An outlier or a trailblazer? Canada pauses rate hikes

by Dan Sweeney, Derivatives Trading Manager Charles Schwab, Charles Schwab & Company

The Bank of Canada maintained an overnight rate of 4.50% at their meeting on Wednesday.

The Bank of Canada maintained an overnight rate of 4.50% at their meeting on Wednesday. The bank had indicated its willingness to make the move in prior statements, given inflation trending downward. In this week’s statement, the BoC said "Overall, the latest data remains in line with the Bank’s expectation that CPI inflation will come down to around 3 percent in the middle of this year." The decision follows 8 consecutive rate hikes, a steady climb which started last March. The decision to keep rates unchanged represented the first time a major central bank has paused rate hikes in the current cycle.The BoC’s decision may represent a turning point in central bank policy as the world works to tame inflation, but there are signs that Canada may be going it alone, potentially weakening the Loonie. On Monday, the Reserve Bank of Australia raised rates for the 9^th consecutive meeting, while in early February the Bank of England issued its 9^th straight hike and the European Central Bank issued its 5^th consecutive increase. The ECB and BoE will update their rates over the next two weeks, along with the Federal Reserve.The market’s response to the BoC announcement was muted, given that it had foreshadowed the move. Today’s US and Canadian employment data and other upcoming domestic announcements could have a significant impact. Next Tuesday will have inflation data, followed by the Fed Funds rate announcement on March 22. The consensus on inflation is a 0.5% monthly increase and 6.4% year-over-year, which would match January’s numbers released last month. According to the CME FedWatch Tool, rates traders expect a 50-basis point increase to a top rate of 5.25%, followed by consecutive 25-basis point hikes in May and June. The March meeting will be accompanied by the Summary of Economic Projections containing the dot plot, which lists the estimates of FOMC members as to where rates will be over the next few years.

Technicals

Traders are moving from the March Canadian Dollar contract (CDH23) to the June contract (CDM23) ahead of the Last Trading Day for the March contract next Tuesday. This week’s selloff pushed the contract below its 9-day moving average, following a bearish 20- and 50-day SMA cross last week. It also pushed the RSI well into oversold territory to a reading of 20 before a rally this morning brought it back up to 29.