• Bank of Canada keep overnight rate on hold at 1.25%
  • Statement drops “cautious” phrase in reference to rates
  • USDCAD drops around 150 pips to fall below 1.29

The latest rate decision from the Bank of Canada has caused a strong move higher in the Canadian dollar, despite keeping the rates unchanged. Market expectations for any movement on the overnight rate were low and as such, the decision to keep it at 1.25% will have caused little market reaction, with the move more likely due to the changes in the statement. 

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 CAD is making strong gains across many of its major peers following the announcement, gaining in excess of 1% against the USD and JPY. Source: xStation

The statement itself contained a pretty hawkish twist with the bank dropping the reference to remaining “cautious” on interest rates. Other selected comments from the release are as follows:

  • Higher rates to be warranted to keep inflation near target
  • Inflation close to 2% target; will likely be a bit higher in near term than forecast in April
  • Global economic activity remains broadly on track with April monetary policy report

The market has taken this news as a pretty clear sign that the BOC are hinting strongly at a future rate hike and the market pricing for a move in July has now jumped above 66% – implying a 2/3 chance they will tighten further. The USDCAD was subject to one of the latest bank recommendations posted yesterday and the pair has taken a sharp turn lower following the release. The market was trading above 1.30 before the news broke but subsequently fell sharply, declining almost 150 pips from peak to trough in just 30 minutes following the release. 

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 USDCAD fell sharply after the release of the BOC statement which seemed to contain a hawkish shift. Source: xStation

To put this drop in perspective the market looks set to engulf the last 4 days of positive trade and has dropped below Friday’s low – when price made an attempted break higher. This is the second time in the past month or so that a break higher has been meet with a firm rejection and given the longer term significance of the region around 1.30 as a prior swing level, then it could mark a major turning point for this market. 

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 USDCAD has seen a push higher met with a firm rejection and today’s trade is currently engulfing the past 4 days of gains. Source: xStation