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If you were thinking about buying the Canadian dollar on the expectation of a Bank of Canada 50 basis point rate hike at the top of the hour, then you might want to consider the price action in the New Zealand dollar today.
The kiwi jumped 30 pips on the headlines and then immediately began to fade. It’s now down 78 pips on the day to 0.6769.
Moreover, the RBNZ half-point hike was a genuine surprise with perhaps a 20% probability priced in while a BOC 50 bps hike to 1.00% is mostly priced in.
Looking ahead, most economists see another 50 bps hike coming in June so guidance along those lines will have an impact. The terminal rate is seen at 2.25% around this time next year. That could go up if the BOC boosts its assessment of the ‘neutral rate’ to 2.75% from 2.25%.
The other thing to watch for are details on the Bank of Canada’s quantitative tightening shift. The BOC may only employ a run-off strategy because 40% of its holdings mature in less than two years. If they shift to selling holdings, that would be hawkish, and positive for CAD.
We will also get a new round of forecasts in the MPR. In January, CPI for 2022 was forecast at 4.2% (will be hiked) and 2.3% in 2023. Real GDP growth was forecast at 4.0% in 2022 and 3.5% in 2023.
In terms of levels, there isn’t much standing in the way of a large USD/ CAD move in either direction.
