Bank of Canada Preview: Three CAD-shaking things to watch out for beyond the 50 bps hike by forexcrunch BoC Canada InterestRates
While that is double the standard increase in borrowing costs, markets have fully priced it in. The main reason is inflation, which has significantly risen in Canada. It isn't only volatile food and energy prices, but also Core CPI, which hit 4.8% YoY in March, and is off the charts.Apart from global supply-chain issues, another driver of price rises is the nation's record-low unemployment rate of 5.3%,. The Canadian economy is on fire, similar to its larger neighbor to the south.
As mentioned, Governor Tiff Macklem and his colleagues already signaled a 50 bps rate hike, which would be in line with the upcoming decision from the US Federal Reserve's parallel move. That is already priced into the Canadian dollar.One of the factors boosting the US dollar has been speculation about two back-to-back 50 bps hikes, in May and in June. For the BOC, it could turn into a series of three double-dose increases.
The BOC currently maintains its balance sheet stable – buying a new bond for each one that expires – but that may end as well. If Macklem only announces that it would allow a natural squeeze of its assets by letting bonds expire, the Canadian dollar would suffer. That would be seen as a cautious form of Quantitative Tightening , the opposite of Quantitative Easing .
However, if he sets the stage for an active sell-off of Canadian government debt, it would mean pulling money out of markets and thus boosting the currency. It is the opposite of printing money.While the Canadian dollar is seen as a commodity currency linked to– and the BOC's monetary policy also tends to be tightly linked with that of the Federal Reserve.
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