The continuing war in Ukraine has overshadowed traders’ sentiment in the last two weeks, fueling financial market volatility and driving oil to its greatest level in more than a decade. The Canadian dollar could gain from elevated crude prices, given that the commodity is one of Canada’s main exports, but that hasn’t exactly been the case. Predictably, the Loonie has traded with a slight positive bias over the past month, briefly reaching 1.2870 last week, an area not tested since late December 2021.
On Wednesday, policymakers raised interest rates by 25 basis points to 0.50% to lead in burning inflation, which hit a new 30-year high of 5.1% y/y in January. Additionally, the central bank indicated that borrowing costs will need to rise further, noted that there is considerable space left to hike over the course of the year and did not rule out the possibility of a rare 50 basis point adjustment in the future to tame soaring consumer prices.
Generally, the hawkish tone adopted by the BoC would have been enough to push the Loonie lower, but with the Ukraine war on everyone’s mind, this has not happened. In a context of growing geopolitical risks, the pair is not likely to decrease, on the contrary, it could go higher in the short term on episodes of flight to safety. Nevertheless, it is important to keep in mind that any de-escalation in the military conflict in Eastern Europe may reverse the situation in the blink of an eye, bolstering the USDCAD and paving the way for a sudden sell-off in USDCAD.
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