Summary:

  • BOC hike overnight rate by 25 bp to 1.5%
  • Hawkish statement also boosts CAD
  • USDCAD falls below 1.31

As was widely expected the Bank of Canada have hiked interest rates and a fairly hawkish accompanying statement has boosted the Loonie which is moving sharply higher in the immediate reaction. The bank announced an increase in the overnight rate of 25 basis points to 1.5% which marks the 4th hike in the past year. 

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 USDCAD fell sharply in the initial reaction with the market moving back below the 1.31 handle to trade back near its lowest level of the week. Source: xStation

Given that the increase in rates was widely telegraphed ahead of today’s decision with implied probabilities in excess of 80% the move itself shouldn’t really have had too big of an impact on the market. Therefore, let’s turn our attention to the accompanying statement which provides further insight into the Bank’s thoughts on future policy and the economy. Below are some selected remarks from the release:

  • Will continue to take a gradual approach and data driven
  • Higher rates will be warranted to restrain inflation
  • Expects CPI declined to 2.5%, returned to target in 2H of 2019
  • higher oil prices to moderate impact of US trade actions
  • sees housing markets beginning to stabilize

Overall the tone of the statement could be seen as hawkish and supportive of the Canadian dollar – or if not hawkish at least not-dovish. There’s very little here to suggest that the Bank will hold off on further rate increases despite trade tensions with the US and therefore there could be more gains ahead for CAD.

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 CAD is moving higher across the board following the decision with the antipodean currencies showing the largest declines. Source: xStation

This appear sot have been a positive event for the Loonie, but it should be pointed out that the press conference is still to come at 4:15PM. It may seem unlikely that the Governor Poloz or deputy Governor Wilkins will provide any dramatic differences to the statement but you never know, so CAD traders will no doubt have a keen eye on it. 

The USDCAD is approaching the level that was mentioned in our latest bank recommendation which can be found here