Canadian Dollar Eyes GBP, BoC Meeting

05/31/2022

1 minute read

2022.05.31 14:56

After a 3-day rally, the Canadian dollar has reversed directions on Tuesday and edged lower. Canada releases GDP for March later in the day.

Canada’s GDP climbed in February by 1.1% MoM, the highest monthly growth rate since March 2021. The March reading is expected to fall to 0.5%.

This would mark a 10th straight monthly expansion. On an annualized basis, GDP is forecast to come in at 5.4%, down from 6.7% prior.

Canada has been easing COVID restrictions, which has boosted the services sector, and manufacturing and construction are also accelerating. Unless the GDP drastically underperforms, I don’t anticipate any pressure on the Canadian dollar today.

BoC set to hike by 50-bps

The focus on GDP won’t be lengthy, as attention will shift to the Bank of Canada rate decision on Wednesday. The BoC is widely expected to raise the benchmark rate by 50-bps, which would move the rate to 1.5%.

This would be a second straight 50-bps hike, as the BoC has signaled that it will aggressively tighten policy in order to curb soaring inflation. CPI has ballooned to 6.8%, its highest level in 30 years, and if inflation continues to accelerate, a massive 75-bps increase cannot be ruled out.

The BoC is clearly feeling the pressure as inflation is yet to ease, and could continue delivering 50-bps salvos. The neutral range for interest rates is around 3 percent, and the big question is will we see inflation peak before rates are that high, or will the Bank have to raise rates above the neutral range in order to wrestle down inflation, which would take a toll on economic growth.

In the meantime, it’s clear that interest rates will continue to rise at the same time that the Federal Reserve is also raising rates. That means the Canadian dollar should not lose ground due to Fed tightening.

Canadian Dollar Eyes GBP, BoC Meeting USD/CAD Daily Chart