Bank of Canada raised rates 25 bps to 0.75%, matching widespread expectations in the announcement. Recent data have boosted the Bank’s confidence in its outlook for above potential growth and the absorption of excess capacity in the economy. They acknowledge the recent softness in inflation but judge it to be temporary. Given the lag between policy action and future inflation, they decided it was appropriate to rate rates. As for future moves, they will be “guided by incoming data as they inform the Bank’s inflation outlook.” Given their ability to look past currently very low inflation, additional firm economic data between now and early September would put that announcement in play for another 25 bp hike as they quickly take back the 50 bp in emergency easing from 2015.
USDCAD fell to 1.2826, a new 10-month low, as the BoC hiked rates by 25 basis points, as many in the market had expected. The fact that WTI crude has topped $46/bbl has added additional weight to the pairing, though given the scope of recent USDCAD losses, profit taking can be expected at some point. The September 7, 2016 low of 1.2822 can be considered as the next support level.
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