USD/CAD: More CAD-favourable short-term yield spreads to reinforce the cap above 1.30 – Scotiabank

The Canadian dollar had a slow-burn response to the larger-than-expected Bank of Canada (BoC ) rate hike. Economists at Scotiabank feel the Bank’s decision to “front-load” rate hikes should provide the loonie with some clear support and, at the very least, strengthen the cap on USD/CAD that has developed above 1.30.

BoC’s tightening should support the CAD against the likes of the EUR, GBP and JPY  

“The bottom line for the CAD for us is that the BoC’s tightening should support the CAD broadly – particularly against the likes of the EUR, GBP and JPY where policy tightening will lag.”

“Against the USD, more CAD-favourable short-term yield spreads should reinforce the cap on USD/CAD above 1.30 and potentially launch spot towards 1.28 in the next few weeks. CAD gains may be limited beyond that point for now as markets assess the peak in the rate cycle and the impact of tighter policy on the domestic economy.” 

“External factors – the broader USD tone, the risk backdrop – may limit deeper USD/CAD losses for now.”