How Has Canadian Dollar Reacted To Inflation Data, Fed’s Decision?

USD/CAD reached a new daily high after the US central bank raised the benchmark interest rate by 25 basis points, as widely estimated, the first hike since December of 2018. As Fed’s Chair Powell speaks, the USD/]CAD is trading at 1.2716.

The Canadian dollar weakened severely, reacting upwards and printing a daily high at 1.2777. The British pound dropped from nearly 1.3100 towards 1.3070s once the headline crossed the wires, while the US 10-year Treasury note yield rose to 2.212%, the highest since May 2019.

Earlier on the day, The Canadian dollar strengthened against its US counterpart on Wednesday as investors were monitoring the start of the Federal Reserve’s interest rate hiking cycle.

Domestic data showed inflation climbing further in February. Canada’s annual inflation rate accelerated in February to hit a fresh 30-year high of 5.7%, with broad price gains hitting consumers on all fronts, bolstering the case for the Bank of Canada to move forcefully on rates.

The BoC needs to show it is serious about inflation risk and adhering to its mandate with a larger move than just 25bps in April. The Bank of Canada hiked interest rates for the first time in more than three years earlier this month, moving by 25 basis points, and said it was prepared to act aggressively if needed to keep inflation expectations grounded.

Money markets expect further tightening at the next policy announcement on April 13 and see a 60% chance that the move is by a less conventional 50 basis points increment. The Canadian dollar was trading 0.5% higher at 1.2715 to the greenback, or 78.65 US cents, after touching its strongest intraday level since March 7 at 1.2689.

World stocks rallied and the safe-haven US dollar fell as investors grew more hopeful for a breakthrough in ceasefire talks between Russian and Ukraine and the Fed hiked interest rates by 25 basis points as expected. The price of oil, one of Canada’s major exports, settled 1.5% lower at $95.04 a barrel.

Canadian government bond yields climbed, led by the front of the curve and tracking the move in US Treasuries. The 2-year touched its highest level since January 2019 at 1.933% before dipping to 1.911%, up 11.2 basis points on the day.