The Canadian Dollar (CAD) is showing modest outperformance following the latest Bank of Canada (BoC) policy decision, according to Scotiabank strategists Shaun Osborne and Eric Theoret. The BoC left its policy rate unchanged, as widely expected, but delivered a slightly more hawkish message than anticipated by the market. Notably, the BoC's statement omitted the phrase that the 'current policy rate remains appropriate' and highlighted that 'upside risks to inflation have increased' [1].
Governor Macklem, in the subsequent press conference, attempted to downplay the significance of the language change, but Scotiabank notes that the shift in messaging was difficult to ignore. The BoC also addressed the impact of recent tariffs levied on Canada, with Governor Macklem stating that these tariffs affect only a small portion of Canadian economic activity and are not expected to have a significant ongoing impact [1].
Market pricing now fully reflects expectations for a 25 basis point rate hike in December, with front-end US/Canada spreads reversing by more than 10 basis points. Technical analysis from Scotiabank indicates that short-term USD/CAD momentum has turned bearish, with fair value for USD/CAD now estimated at 1.3811, down from 1.3880 the previous day. The strategists see scope for USD/CAD to move into the mid/upper 1.37s, with resistance expected in the 1.3900/20 zone [1].
A new round of forecasts is expected at the BoC’s October meeting, and there is a clear sense that the revised inflation outlook could set the stage for further tightening by the central bank [1].
CONCLUSION
The Canadian Dollar is benefiting from the Bank of Canada's unexpectedly hawkish tone, with markets now fully pricing in a December rate hike. Technical and market indicators suggest further CAD strength and USD/CAD downside in the near term, as investors await the BoC's updated forecasts in October.