The Bank of Canada decided to raise interest rates to 1.25% from 1.00% yesterday, as the market was expecting. The statement accompanying the decision urged caution and was perceived from various analysts as dovish. Hence, there was high volatility upon the announcement, however it settled down quickly with little to no weakening for USD/CAD. The statement accompanying the decision stated that there is increased uncertainty stemming from the future of the NAFTA Agreement. The statement also stated that GDP was to rise by 2.2% in 2018 and inflation is to remain near 2% over the projection horizon. These two points should support the argument for the BoC to remain on the side-lines possibly without taking any further action in the near future or at least until the fog clears up. Such a development could be of neutral to negative effect for the CAD. However, the overall strength of a currency is decided by multiple factors and in CAD’s case also by oil prices. Having said that, it would be important to stress that Governor Poloz said on earllier occasions, that it is not so much the tone of the accompanying statement that clarifies the future interest rate hike path, as it is the various financial date preceding any BoC meeting.
The USD/CAD had a volatility of about 170 pips yesterday, during the release of BoC’s interest rate decision, however it more or less traded in a sideways manner throughout the day testing the 1.2450 resistance line. We expect the pair to continue to trade in a sideways manner, however it could be influenced by the release of the US financial data regarding the housing starts and the crude oil inventories. Should the pair come under buying interest, we expect it to break the 1.2450 resistance level and aim for the 1.2520 resistance hurdle. Should there be increased selling interest the pair could break the 1.2350 support barrier and hover slightly below it.
