The Bank of Canada (BoC ) is set to raise its overnight rate by 50bps at its policy announcement on Wednesday – this is fully priced in by markets. Economists at Scotiabank expect the USD/CAD pair to edge lower towards 1.25 if the central bank also signals one or more additional 50bps hikes are on the horizon.
CAD awaits 50bps hike and hawkish guidance
“Overextended markets should not be too disappointed with a 50bps hike if the bank’s guidance suggests that one or more additional 50bps hikes are on the horizon. This scenario would likely translate into CAD gains back to below the 1.26 mark with additional strength to a test of 1.25 over the next few days depending on whether guidance points to 50bps in both June and July, but also on a recovery in the weak risk and commodities backdrop seen in recent trading.”
“A 50bps hike that is not accompanied by hawkish guidance that tees up a half-point-hike repeat would likely result in losses that would see it aim for a test of 1.27 per USD.”
“The size of the negative reaction in the CAD to a 25bps hike would largely depend on the bank’s forward guidance. If the smaller-than-expected hike is not accompanied by a change in language that clearly tees up large hikes over the next few meetings, then the CAD may suffer losses above the 1.28 level over the coming days or weeks. If the BoC, in its ‘deliberate’ approach, chooses to go with 25bps while teeing up large hikes at upcoming meetings then the losses in the CAD may be limited to somewhere around 1.2750.”
See – BoC Preview: Forecasts from 10 major banks, hard to argue against a 50 bp hike
