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The Canadian dollar has extended its gains today, as the US dollar has retreated against all the major currencies. In the European session, USD/CAD is trading at 1.3547, down 0.44%. Earlier, USD/CAD dropped as low as 1.3512, its lowest level in three weeks.
Bank of Canada likely to remain hawkish
All eyes are on the Bank of Canada, which will meet later today. The markets have priced in a 75 basis point hike, which would be a repeat of the September rate increase. The Bank has embarked on a steep rate tightening cycle, having hiked 300 points since March.
A 75 bp move today will bring the benchmark rate to 4 percent, its highest level since the 2008 global financial crisis. Of course, the economic picture is not nearly as grim as it was then, but inflation has been stickier than expected, and the BoC has declared that its first priority is to curb inflation.
In September, headline inflation ticked lower to 6.9%, down from 7.0%, but core inflation rose to 6.0%, up from 5.8%. Until this report, the markets had been expecting the BoC to deliver a 50 bp hike at tomorrow’s meeting. Still, the September inflation data has raised the likelihood that policymakers will come out with guns blazing and increase rates by 75 bp.
At the same time, there is an outside chance that the Bank will opt for a 50 bp hike, mindful that higher rates are weighing heavily on consumers and businesses, and a recession could be lurking just around the corner.
With inflation driving the Bank of Canada’s rate policy, I would not be surprised to see some volatility from the Canadian dollar in the North American session.
USD/CAD Daily Chart
- USD/CAD is testing support at 1.3656. Below, there is support at 1.3467
- 1.3718 and 1.3807 are resistance lines