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USD / CAD - Canadian dollar drops after BoC hikes

- Bank of Canada hikes 50 bps, hints it’s the last

- Traders unnerved after Putin talks nukes again

- US dollar modestly lower compared to Wednesdays open.

USDCAD snapshot open 1.3651-55, overnight range 1.3649-1.3687, close 1.3653, WTI $72.53, Gold $1783.92

The Canadian dollar rallied following the headline that the Bank of Canada (BoC) hiked rates 50 bps yesterday. The gain was short-lived when it became apparent that the increase may have been the last for this cycle.

The BoC statement said, “Looking ahead, Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target.”

Canadian interest rates have risen 400 bps since March. It is an aggressive move but considering that the increases started from an extremely low level, not out of line. It makes sense for policymakers to await a few more data points and the outcome of next week’s FOMC meeting to assess the effectiveness of the rate hikes in lowering inflation.

However, inflation was at 6.9% y/y in October is nearly 5.0% above the central banks target, so suggesting the rate hike cycle is over sounds premature.

Furthermore, Governor Tiff Macklem and his colleagues have done a poor job in communicating policy outlook. The were dovish when they indicated a hawkish response, and vice versa and seem to enjoy surprising markets. Is that a strategy or just incompetence?

USDCAD dropped from 1.3650 to 1.3588 in the wake of the 50 bp rate hike they bounced to 1.3650 where it closed. Traders are concerned that the spreads between CAD and US government bonds will widen, especially if the Fed hikes 50 bps next week and indicates another 100 bp in hikes are in the cards.

Wall Street closed defensively after a low-volume session and Asian markets did the same. Hong Kong’s Hang Seng index was the exception and gained 3.36% after HK authorities discussed a major easing of covid restrictions.

European bourses are close to flat while S&P 500 futures have gained 0.34%. The US 10-year Treasury yield consolidated recent losses in the 3.44% area. Yields are down on speculation the Fed is close to ending its rate hike cycle.

G-10 FX was very quiet with traders sidelined ahead of next weeks US inflation data, and Fed, and ECB monetary policy meetings.

The only data of note today is US weekly jobless claims.