Canadian Dollar Poised to Extend Losses: City Index

• CAD underperforms in wake of Bank of Canada
• Bank unlikely to consider hiking again, for now
• Creates policy divergence with U.S., other regions
• USD/CAD forecast towards 1.40s by City Index

The Bank of Canada, Ottawa. Image reproduced under CC licensing conditions.

The Canadian Dollar extends its losses following Wednesday's decision by the Bank of Canada to pause its interest rate hiking cycle. More losses are likely says City Index's Fawad Razaqzada.

The USD/CAD has just hit its highest level since November 2022 after the Bank of Canada kept interest rates unchanged at 4.5% and US JOLTS Job Openings came in ahead of expectations at the same time, providing fresh ammunition for the greenback after Powell’s hawkish message on Tuesday.

The Bank of Canada was a bit more dovish as had been expected, keeping policy unchanged for the first time in 12 months.

It acknowledged GDP weakness and employment strength, but there was no mention of excess demand in the policy statement and said the North American economy is to remain weak in the next couple of quarters.

The BoC said it expects to hold the key rate at the current level, conditional on economy developing broadly in line with forecasts.

It is prepared to increase rates further if needed to return inflation to the 2% target (they had to add this, to hedge their bets like all other central banks – right?).

The policy statement also dropped language about the economy remaining in 'excess demand'.

Canadian Divergence with the U.S. Grows

Meanwhile, there was more evidence the U.S. labour market is rather hot as firms advertised more job openings.

JOLTS Job Openings 10.824 million vs 10.546 million expected and 11.012mm previous.

The latest data comes after the Fed Chair sent everything plunging on Tuesday after warning that the central bank could ramp up the pace of rate hikes and could keep a tight policy in place for longer.

This sent the odds of a 50-basis point rate hike for the March 22 meeting to above 70%, according to the CME FedWatch tool.

The market was previously pricing in 25 basis points for this meeting. The terminal interest rate is now expected to climb closer to 6% than closer to 5% expected at the end of January.

Short-ended yields have correspondingly risen as the Fed continues to front-load rate hikes.

Next Targets for the Canadian Dollar

Image courtesy of City Index.

Following recent macro events, the USD/CAD hit a new multi-month high. The Loonie has potentially paved the way for a run towards 1.3800 next.

Above that level, we have last year’s high at 1.3977 and then the key 1.40 handle next.

But with the macro data mostly out of the way, it remains to be seen whether we will get to those levels or see a retracement first.

It is possible that some traders may now ease off the gas until Friday to push rates significantly from around current levels. On Friday we have jobs reports from both North American nations.

Even if we see a pullback, the bullish trend will remain in place for as long as key support around 1.3650 does not break. Ahead of that, short-term support is seen around 1.3760 and then at 1.3700.

Regardless of the short-term, we maintain a bullish view on this pair thanks to the Fed getting hawkish again.