Mid-Day Report

Canadian Dollar Surges as BoC Raises Overnight Rate to 0.75%, Open to Further Hike

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Canadian Dollar surges broadly as BoC delivered the highly anticipated rate hike as widely expected. The overnight rate target was raised by 25bps to 0.75%. More importantly, the central bank delivered a upbeat outlook and adopts an open stance to further policy adjustments. USD/CAD extends recent decline to as low as 1.2824 and is still on course to retest 2016 low at 1.2460. EUR/CAD drops through recent support at 1.4649 and is heading to 1.4597 key near term support level.

BoC noted that "recent data have bolstered the Bank's confidence in its outlook for above-potential growth and the absorption of excess capacity in the economy." And "acknowledges recent softness in inflation but judges this to be temporary."

GDP growth is expected to moderate to 2.8% in 2017, 2.0% in 2018 and 1.6% in 2019. More importantly, "output gap is now projected to close around the end of 2017, earlier than the Bank anticipated in its April Monetary Policy Report (MPR)."

Regarding inflation, BoC acknowledged that three measures of core inflation all remained below 2%. But said that "the factors behind soft inflation appear to be mostly temporary, including heightened food price competition, electricity rebates in Ontario, and changes in automobile pricing". It projects inflation to return to 2% by the middle of 2018.

BoC concluded by stating that "future adjustments to the target for the overnight rate will be guided by incoming data as they inform the Bank's inflation outlook, keeping in mind continued uncertainty and financial system vulnerabilities." This suggests that it's open to further rate hike if data supports.

USD/CAD Mid-Day Outlook

Daily Pivots: (S1) 1.2884; (P) 1.2914; (R1) 1.2943; More....

USD/CAD's decline continues today and reaches as low as 1.2815. Intraday bias remains on the downside. Current decline from 1.3793 is on course to retest 1.2460 low. On the upside, break of 1.2942 resistance is needed to indicate short term bottoming. Otherwise, outlook will remain bearish in case of recovery.

In the bigger picture, price actions from 1.4689 medium term top are seen as a correction pattern. The second leg should have finished at 1.3793. Break of 1.2460 will extend such correction to 50% retracement of 0.9406 to 1.4869 at 1.2048. At this point, we'd look for strong support from there to contain downside and bring rebound. However, firm break there will target 100% projection of 1.4689 to 1.2460 from 1.3793 at 1.1564.

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