The Bank of Canada (BoC) announced a 50 bps increase in the policy rate to 3.75%. USD/CAD dropped back below 1.36 after a spike to 1.3650. Nonetheless, economists at Rabobank expect the pair to grind higher towards 1.40.

USD strength to re-emerge in the coming weeks

“The BoC surprised the market with a 50 bps hike to 3.75%, in contrast to market-implied pricing, which pointed to a 75 bps increase.”

“Growth forecasts were revised down by 1ppt to 1.0% in 2023, and -0.5ppt to 2% in 2024. Inflation forecasts were slightly lower, down -0.5ppt to 4% in 2023 and -0.1ppt to 2.2%.”

“While we have reduced our terminal rate forecast by 25 bps in light of today’s smaller than expected 50 bps hike, we still expect another 50 bps hike in December, 25 bps in January, and a holding pattern after that into 2024.”

“In terms of USD/CAD, the unwind of the initial spike higher to 1.3650 was somewhat surprising, but the recent decline in the pair is a product of a USD positioning clearout rather than a change in trend, and we still see the pair touching the 1.40 handle before year-end as USD strength re-emerges in the coming weeks.”