USDCAD Pair Fell As the CAD Rallied on the BoC 0.25% Rate Hike

The USDCAD currency pair was trading down over 51 pips as the Canadian dollar rallied against its US competitors after the Bank of Canada (BoC) hiked interest rates by a higher-than-expected margin. The BoC hiked rates by 0.25%, while many analysts had expected the bank to keep rates stable.

The higher interest rate hike strengthened the Canadian dollar, also known as the loonie, as the BoC elaborated that it had chosen to hike interest rates after noticing that excess demand in the economy was more persistent than initially expected despite the rates being stuck at 4.50%.

The Canadian dollar’s rally was further boosted by the US dollar’s weakness, as tracked by the US Dollar Index, which was trading sideways for the third day in a row showing that investors were undecided about the direction in which the US dollar should move. 

The US dollar’s performance remains uncertain as the Dollar Index faces some stiff resistance at the 105 level, which could send the index lower as other currencies perform better than the dollar, which includes the Canadian dollar. 

Digging deeper into the Bank of Canada’s policy statement, we find that the central bank is worried about the underlying inflation, which remains stubbornly high globally, making it necessary for central banks to continue hiking interest rates. 

The BoC reiterated its desire to bring price stability as it continues monitoring the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the bank’s inflation target.

The central bank expressed concern that inflation could be stuck permanently above its inflation target of 2%, which necessitated the rate hike. Many analysts expect the BoC to hike rates once more, given that if rates at 4.50% were inadequate to control inflation, it's doubtful the 4.75% will do the job. 

Meanwhile, the Canadian dollar remains stronger than the dollar for now as investors look forward to next week’s interest rate decision from the US Federal Reserve and the Fed’s revised dot plot. 

*This is not investment advice. 

The USDCAD price chart.

The USDCAD currency pair was trading down 51.8 pips (0.39%) as the Canadian dollar rallied against its US peer.