BoC signals hikes to 3%: CADJPY upside ahead?

The Bank of Canada came out fighting this Wednesday & Thursday. The central bank announced a 50bps rate hike, continued QT,and talked of being ‘prepared to act more forcefully if needed’ in the policy statement.

That hawkish rhetoric seemed to be ignored by the market on Wednesday, with USDCAD posting a hammer candle on the daily chart, often seen as a sign of a reversal.

Then the Deputy Governor came out on Thursday to really press the message home. CAD strengthened and the prior day’s price action was eaten up by a wide bearish engulfing candle:

What did Deputy Governor Beaudry say?

Plenty. In a speech titled ‘Navigating a high inflation environment’ he takes us back to the April decision:

“At that time, we discussed the future path of interest rates relative to a neutral rate that neither stimulates nor weighs on growth. We estimate this is between 2% and 3%. We indicated that it was important to get the policy rate quickly back to neutral.

“Once there, we would consider whether to pause before raising rates further. If inflation pressures were more persistent, we would likely need to move the policy rate somewhat above neutral to bring inflation back to the target.”

With inflation running way above target at 7%, and an economic (and employment) rebound that was faster and stronger than the central bank expected, they’re signalling a readiness to act by pushing the benchmark rate up to 3% or higher.

The risk of inflation expectations and high inflation becoming entrenched is a risk they’re taking very seriously indeed.

Oil prices could also be a driver for the Canadian dollar. Ahead of Thursday’s OPEC+ meeting, oil dropped amid speculation that members, (especially Saudi Arabia & the UAE) were about to increase production to replace lost Russian output.

Although OPEC+ did agree to hike production by 648,000 barrels per day for July & August, oil prices recovered after the decision and closed up on the day. Analysts note that it’s one thing increasing the quota, but quite another to actually meet the quota, something OPEC+ has struggled to do for months now.

Also, the two members with the most spare capacity on paper (Saudi Arabia & UAE), have essentially been granted an extra 75,000 bpd production quota, while other members, including Russia, missed their April production targets by a collective 2.6 million bpd…

If oil prices remain sticky at these elevated levels (or higher), and the Canadian central bank hikes aggressively to 3% or above as they are suggesting will be necessary, CADJPY could see some action.

There’s a potential double whammy for Japan here. A term of trade shock due to being a major energy importer on top of widening interest rate differentials as the bank of Japan stands resolute with their low rate policy.

And the pair has broken out after a few weeks of consolidation…

Could the 2014 high of 106.54 be in sight?

Not investment advice. Past performance does not guarantee or predict future performance.