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Canadian Dollar rallies after BoC rate decision


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  • Canadian Dollar strengthens on Wednesday after the Bank of Canada decides to raise interest rates by 0.25%.

  • Just-released US inflation data further weighs on the USD/CAD after missing estimates.

  • The technical picture is mixed as despite a bullish break above the key 1.3270 high, the exchange rate has reversed lower in the short-term.

Canadian Dollar (CAD) rallies strongly against the US Dollar (USD), on Wednesday, after the Bank of Canada (BoC) decides to raise interest rates by 0.25%, bringing the policy rate to 5.00%. The announcement adds to the momentum enjoyed by the CAD vs. USD after the release of US inflation data earlier in the day, which showed a deceleration in both headline and core measures of inflation, hurting the Buck. The next key event for the pair is the press conference with BoC Governor Tiff Macklem at 15:00 GMT. 

USD/CAD is now trading in the 1.31s, down half a percentage point on the day, during the US session.  

Canadian Dollar news and market movers 

  • The Canadian Dollar rallies after the BoC decides to raise interest rates by 0.25% at its July meeting on Wednesday. The BoC increased the policy rate, or overnight rate to 5.00% from 4.75%, the bank rate to 5.25% and the deposit rate to 5.00%. 

  • The BoC’s decision comes as it expresses concern at the persistence of core inflation. “With three-month rates of core inflation running around 3½-4% since last September, underlying price pressures appear to be more persistent than anticipated.” Said the Bank in its accompanying statement. The BoC’s mandate is to maintain core inflation at 1-3%.

  • The Bank also revised its forecasts of future inflation to show a slower fall to target, “CPI inflation is forecast to hover around 3% for the next year before gradually declining to 2% in the middle of 2025. This is a slower return to target than was forecast in the January and April projections.”

  • The decision comes after the release of critical US Consumer Price Index (CPI) data for June, which weakened the US Dollar. The annual headline CPI came out at 3.0%, one basis point below the 3.1% forecast, and well below the 4.0% at the same time last year. On a MoM basis CPI rose by a lower 0.2% than the 0.3% expected. 

  • Core CPI inflation, which the Federal Reserve targets, came out at 4.8%, which is below the expected 5.0%, and half a percentage point below the previous year’s 5.3% reading. On a monthly basis, US Core rose by a slower 0.2% vs. 0.3% prior.

  • The second half of 2023 is unlikely to be as good as the first say analysts at one of Canada’s largest banks, National Bank of Canada, as the BoC will take a cautious approach to changing interest rates.

  • Furthermore, a global economic slowdown will weigh on commodity prices, negatively impacting Canada’s terms of trade, says the note cited on Poundsterlinglive.com. 

Canadian Dollar Technical Analysis: Short-term trend giving mixed signals

USD/CAD is in a long-term uptrend on the weekly chart, which began after price rose following the 2021 lows. Since October 2022, the exchange rate has been in a sideways consolidation within the uptrend. Given the old saying that ‘the trend is your friend’, however, the probabilities overall an eventual continuation higher, favoring longs over shorts.-

The pair appears to have completed a large measured move price pattern that began forming at the March 2023 highs. This pattern resembles a 3-wave zig-zag, much like an ABC correction in which the first and third waves are of a similar length (labeled waves A and C on the chart below). 

USD/CAD’s measured move looks like it has completed given waves A and C are of a similar length. This suggests price probably bottomed at the June 27 lows and is now at the start of a new cycle higher. 

A confluence of support situated under the June lows in the upper 1.3000s, that is made up of several longer moving averages and a major trendline, provides a backstop to further losses. Only a decisive break below 1.3050 would indicate this thick band of weighty support has been definitively broken, bringing the uptrend into doubt. 

US Dollar vs Canadian Dollar: Weekly Chart

The daily chart below shows how price has now broken decisively above the 1.3270 key last lower high of the prior downmove, which is a bullish sign. 

USD/CAD subsequently rose up to just shy of the 1.3400 crossroads where the 50-day Simple Moving Average (SMA) is located, last Thursday, before reversing lower last Friday.

The long green up day followed by the long red down day creates a two-bar reversal pattern which is a short-term bearish sign, however, this clashes with the other bullish indications, suggesting a balanced market. 

US Dollar vs Canadian Dollar: Daily Chart

Price action this week has also been bearish with price breaching below 1.3200 temporarily overnight on Tuesday. 

It will take a decisive break above the 50-day SMA, therefore, to keep the uptrend momentum going. Canadian Dollar bulls marginally have the upper hand with the odds slightly favoring a continuation higher. 

A decisive break higher is one that is accompanied by the lengthening of a long green bullish daily candle that closes near its highs, or three bullish green candles in a row. 

Bank of Canada FAQs

The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.

In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.