What could BoC’s Wednesday meeting impact the Canadian Dollar?

The CAD/USD pair is trading at 1.3412 at the time of writing versus the previous closing at 1.3463, down by -0.40%. Next Wednesday, the BoC will hold its monetary policy meeting. Analysts expect a 25-basis points rate hike in line with market consensus. They point out the Canadian dollar may not receive much direction bias from the meeting.

Analysts also expect the next hike will be the last hike in the current tightening cycle, though the forward-looking component will not preclude future hikes.

While this is expected to be the last hike, the Canadian dollar may not receive much directional bias from the upcoming meeting as the curve may continue to be biased about looking at the other side of this interest rate cycle.

The central bank meetings and the Bank of Canada will be the next after the BoJ to announce its first policy decision of the year. Investors will be nervously awaiting the first PMI readings of 2023 next week as they yearn to reach a consensus about the recessionary risks.

In the United States, there will additionally be the advance GDP estimates for the final quarter of 2022, as well as PCE inflation data. The latest CPI numbers will be at the forefront too in Australia and New Zealand.

After spending much of 2022 front loading rate hikes, many central banks are now nearing the end of their tightening cycle and this theme is likely to dominate at least the first half of 2023.

The Bank of Canada could take the lead in pausing rate hikes when it meets on Wednesday, but in all probability, it will raise its overnight rate by 25 basis points to 4.50% in one final tightening round.

Inflation in Canada peaked back in June but then stubbornly hovered slightly below 7%. There was better news from the December data as the retreat in CPI gathered pace, sliding to 6.3% y/y. However, underlying measures of inflation haven’t budged much in the last few months. Employment surged in December, making a hiking pause appear somewhat questionable.

Markets have assigned about a 60% probability of a 25-bps rate rise, with the remaining bets placed on no change. This gives the Canadian dollar some scope for gains should the BoC lift rates in line with expectations. However, if the Bank maintains the same language as last time that it will be considering whether the policy interest rate needs to rise further, and the CAD could slide after the decision.