The Bank of Canada (BoC) delivered on the widely expected 50bp hike in June. The CAD edged a little lower in the aftermath of the decision. However, economists at Scotiabank expect the USD/CAD pair to plummet towards the 1.2500/50 zone.

Hawkish BoC supports CAD

“The BoC policy decision delivered the expected 50bps hike, taking the Overnight Rate to 1.50%. The rate increase was accompanied by hawkish language which suggests limited CAD downside.” 

“Canadian 5Y yields have collapsed the differential over similar US yields since early May; moving to a premium for Canadian yields should support further CAD strength. In addition, we consider: 1) Canada’s positive terms of trade amid still rising commodity prices and 2) relatively better domestic data outcomes compared to US data surprises, suggesting a more resilient economy, as important CAD supports.”

“We look for solid resistance in the 1.2685/1.2715 zone in the short run and strong resistance now in the mid-1.27s.” 

“Downtrend in the USD has picked up momentum since edging below key support around 1.2740 and we think the USD is at risk of falling to the 1.2500/50 over the next few weeks. Speculation of a 75bps hike puts 1.24 on the radar over a similar timeframe.”