Today bank of Canada will publish its monetary policy and rate decision. Overnight rates are expected to be unchanged.
The Bank of Canada may leave all policy levers unchanged today. But it's essential to watch what governor Tiff Macklem says during her statement today.
The inflation rate is currently at an 18-year high in Canada. Moreover, supply pressures could lead prices up further, with transportation contributing most recently as gasoline continues its climb towards record levels.
Higher gasoline price is helping CAD against all the major currencies as a commodity currency. That's a positive sign for the Canadian economy as well as CAD.
How should the Bank of Canada React?
The BOC is expected to continue trimming back its bond-buying program. Governor Marklelm calls "the reinvestment phase," where they keep a stable amount of funds invested in bonds while buying only enough new ones each year that are set to mature.
This will tighten monetary conditions, nudging up yields for those who invest with them but not likely be enough alone if inflation continues at this rate or higher. Governor Macklem may even suggest earlier interest rate hikes than Q2 2022 when things seem incredibly tight right now.
So, based on all the fundamental factors together, CAD is still strong enough. Moreover, CAD will be more robust in the upcoming days because several financial parameters support Canada.
But, as BOC is expecting to unchanged its monetary policy, USD/CAD may spike upside first, and then it will drop again to the 1.2300/1.2280 or below price zone.
Technical View:
If the monetary policy is unchanged from the present rate, our upside target is 1.2480/1.2500. Breaking above 1.2500, our final target is the 1.2580/1.2600 price zone.
But, if BOC delivers a too dovish speech, we will continue our buy order till 1.2700/1.2720 price zone.
On the other hand, if BOC delivers an unexpectedly hawkish statement, USD/CAD might drop below 1.2280 to 1.2200 price zone very soon. Though inflation is rising in Canada, gasoline price, asset purchase, and optimism in rising bank rate will benefit the CAD.