Canadian dollar drifting ahead of BoC

The Canadian dollar is almost unchanged on Wednesday, trading at 1.3373 in the European session.

BoC expected to hike by 25 bp

The Bank of Canada is expected to raise rates by 25 basis points at today’s meeting, the first of the year, which would bring the cash rate to 4.50%. The BoC has been aggressive, raising rates by some 400 basis points in the current rate-tightening cycle which began in March 2022. At the last meeting, BoC Governor Macklem had said that the BoC would likely pause in January, barring a major change in the data. So what has changed? Inflation levels have fallen in line with BoC projections, but the labour market created a massive 100,000 new jobs in December, crushing the estimate of 7,000. The big question is whether the December jump was a one-time spike or will the solid employment numbers continue. If the labor market remains strong, the BoC may have to continue raising rates. The odds for a 25-bp hike stand at 75%, with a 25% chance of the BoC taking a pause.

BoC policy makers can’t be happy with the slow decline in inflation. The BoC has hiked rates by some 375 basis points since March, but inflation has fallen modestly, from a high of 8.1% in June to 6.3% in December. That is far too high for the BoC’s liking, but with the economy showing signs of weakness, such as GDP and wage growth, future rate moves (or non-moves) will be largely data-dependent.

The US releases GDP for Q4 on Thursday and we could see some volatility from the US dollar. GDP is expected to slow to 2.8%, down from 3.2% in Q3 but still a respectable pace of growth. On Wednesday, US PMIs pointed to a decline in the manufacturing and services sectors, pointing to cracks in the US economy as high rates have dampened economic growth. The US dollar remains under pressure as soft US numbers have raised hopes that the Fed will ease up on rate policy due to the slowing economy.

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USD/CAD Technical

• 1.3455 is a weak support line, followed by 1.3328
• 1.3582 and 1.3707 are the next resistance lines

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