The latest Bank of Canada policy update proved even more hawkish than expected triggering the Canadian dollar’s best daily performance since June. BoC’s increased confidence in the economic outlook has led Lee Hardman, Currency Analyst at MUFG Bank, to think the USD/CAD will fall to 1.23 sooner than expected.
See: USD/CAD to nosedive below the 1.20 mark by year-end – ING
Yield spreads moving in favour of CAD
“The BoC brought forward plans to begin raising rates from the second half of next year having previously indicated that hikes would start from 2023. It provides a strong bullish signal for the Canadian dollar in the near-term as it will encourage market participants to continue pricing in more rate hike expectations into next year thereby helping to lift Canadian short rates.
“The BoC’s decision to bring forward plans for the timing of the first-rate hike into the second half of next year stands in marked contrast to the Fed’s recent dovish update when they reiterated that they still do not plan to hike rates until 2024. In reality, the timing gap is unlikely to be so wide, we expect the Fed to begin raising rates from 2023. Nevertheless, the updated forward guidance from the BoC suggests that they are not overly concerned about encouraging higher rates and a stronger Canadian dollar in the near-term.”
“The improving growth outlook also prompted the BoC to scale back the weekly pace of QE purchases to CAD3 B from CAD4 B in line with market expectations. Further QE adjustments will depend on the BoC’s assessment of the strength and durability of the recovery.”
“In light of these developments, our bullish forecast for the Canadian dollar could prove too cautious. Downside risks have increased to our year-end USD/CAD target of 1.2300 which could be reached sooner.”
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