The USDCAD currency pair was trading down 50.5 pips shortly after the Bank of Canada hiked interest rates by 50 basis points, as widely expected. However, the Canadian overnight rate now stands at 4.25%, and the central bank has signalled that it is considering halting rate hikes.
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The BoC’s Governing council said it would consider whether there is still a need to continue raising interest rates after signs of cooling emerged in different sectors of the economy.
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Demand within the housing market has started slowing down, while the broad upward price pressures seen across the Canadian economy earlier this year have started cooling down.
Investors reacted positively to today’s rate hike despite the BoC warning that the country’s economy faces the risk of a recession in the first half of 2023. Maybe this was because other countries face much worse recession risk than Canada.
The Canadian dollar strengthened against its US peer, but the gains were limited by the falling crude oil prices as tracked by the West Texas Intermediate, which has fallen for the past four consecutive days.
As a net oil exporter, Canada draws a significant portion of its foreign exchange revenues from oil sales, and lower oil prices negatively affect the company’s revenues. In addition, the risk-off market sentiment also hampered the loonie’s gains amid high demand for the safe-haven US dollar.
Analysts at the National Bank of Canada today issued a note saying that they expect the Canadian dollar to outperform its US peer next year, given that the Fed has already signalled its willingness to cut rates next year to boost the country’s economic growth.
However, the falling oil prices may not bode well for the loonie as many expect global demand to cool down next year as many countries battle recessions. However, the US may fare better given the Fed’s willingness to embrace easy money policies ahead of its peers.
The Federal Reserve’s aggressive rate hikes ahead of its peers gave the US dollar a significant advantage this year. The same may happen to the US economy next year if the Fed stops hiking rates and decides to hold them steady for a while.
*This is not investment advice.
The USDCAD price chart.
The USDCAD currency pair was trading down 50.5 pips (0.37%) at writing after the BoC rate hike.
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