The Bank of Canada oC delivered a hawkish statement, announcing it will be tapering QE and signaling that it expects to begin lifting rates in the second half of 2022. The CAD sharply appreciated following the hawkish shift. Taken together with taper, a gangbusters growth outlook, and a signal towards earlier rate hikes/ output gap closure, USD/CAD rallies should be faded, as reported by TD Securities.
The BoC has effectively now become the second most hawkish central bank in the G10
“The April BoC meeting saw two major developments. First, the Bank confirmed in the policy statement that it will adjust the weekly pace of GoC purchases to target $3 B, down from the current $4 B. The second development was in the forward guidance, where the Bank pulled forward the timeline for the output gap to close. The Bank now looks for a return to full capacity in the second half of 2022 (instead of 2023). The overnight rate was left unchanged at 0.25%.”
“We continue to look for the BoC to lift the overnight rate in October 2022, as we think the BoC’s growth profile probably errs on the optimistic side. We also see potential for some very uneven messaging from the BoC in the months ahead, because any downside surprises to the BoC’s forecast will raise questions around the sustainably for 2022 rate hikes (as will continued sharp moves in the currency or rates market). We also look for the BoC to reduce its weekly GoC purchases by another $1 B per week in July and October.”
“Unless risk sentiment significantly takes a turn for the worse (which we think is a difficult proposition given the global growth outlook and broadly accommodative financial conditions), USD/CAD rallies should be faded now that the Bank has signaled earlier rate hikes.”
“Tactically, 1.2475 should be keep support for USD/CAD but we are biased to see a re-test of the covid era lows from mid-March at 1.2365.”