USD/CAD faces a looming 50 bps rate hike by the Bank of Canada. While increasing the Overnight Rate to 1.5% is in the price, a pledge to savagely fight inflation has room to lift the loonie. Moreover, other factors also provide a backdrop for a bearish bias on USD/CAD.
As elsewhere in the world, inflation is rising in Canada. However, the northern nation is similar only to the US in suffering rapid rises in underlying prices. The Core Consumer Price Index (Core CPI) jumped by 5.7% YoY in April. That is just below 6.3% in America – yet at least it is trending down south of the border.
Increases in energy and food prices are impacted by global factors which central banks cannot control. However, when inflation is widespread, the BOC can cool lending and encourage saving by raising interest rates.
Inflation can become a self-fulfilling prophecy if consumers anticipate prices to rise and increase purchases now to get ahead of rising prices. Canada already exceeds the US and many other developed economies.
It is hard to see the Bank of Canada drift away from the hawkish tones of the Fed and the European Central Bank, the Reserve Bank of New Zealand and others. The Canadian real estate market may take a hit, but the BOC may “do whatever it takes” to bring inflation to its knees.
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