One week before the Federal Reserve of the United States announced its December decision, the Bank of Canada raised the policy interest rate by another 50bp. It has now reached 4.25%.
While it is way higher than the rate during the COVID-19 pandemic, the policy interest rate remains well below the CPI inflation. In October, total CPI inflation in Canada reached 6.9%.
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But the Bank of Canada is not only raising the rates. It is also continuing its policy of quantitative tightening.
The quantitative tightening process works in the opposite direction than the quantitative easing applied during the pandemic. As such, it complements the increases in the policy rate and further contributes to the tightening process.
Therefore, one might say that the difference between the total CPI inflation of 6.9% and the policy interest rate of 4.25% is reflected by the quantitative tightening. If that is the Bank of Canada’s intention, then a USD/CAD price forecast for the period ahead is tricky.
Bullish price action for USD/CAD in 2022
2022 will remain in history as the year when central banks began their fight against global inflation. On top of that, global economic growth is slowing, making it even more difficult to raise rates in such an environment.
The Fed and the Bank of Canada tightened policies, but the market participants have focused on the world’s reserve currency – the US dollar. The exchange rate reflecting the different policies, the USD/CAD, was in a bullish trend for most of the year, as reflected by the series of higher highs and higher lows, representative of such a trend.
Furthermore, the market reacted to resistance/support levels, respecting the interchangeability principle between the two.
Because of that, and unless the USD/CAD drops below 1.32, it remains bullish. Another attempt to 1.40 should be in the cards, regardless of the Bank of Canada’s December decision.
Source: https://invezz.com/news/2022/12/08/usd-cad-price-forecast-after-the-bank-of-canadas-december-rate-hike/