USD/CAD is set to shoot higher with the Bank of Canada delivering Dovish rate hike

Remember Sterling’s reaction after the Bank of England delivered dovish rate hike back in November last year? Let me remind you.

GBP/USD was trading at around $1.3260 morning, November 2, 2017, before the Monetary Policy Committee was set to decide on interest rates and also provide the commentary while presenting fresh macroeconomic forecast in its November Inflation report. The Bank of England increased the Bank rate by 25 basis point back in November for the first time in 10 years and the FX market sold the Cable all the way down to $1.3035 in the aftermath of the November Inflation report press conference. The Bank of England delivered a rate hike in line with market expectations, but the commentary from the Bank of England Governor Mark Carney was very dovish as he indicated two more 25 basis point rate hikes for next three years. This is what the dovish rate hike meant for GBP/USD.

Yet, a similar reaction is set to follow the rate hike by the Bank of Canada on Wednesday, January 17 with the Ottawa based central bank also expected to hike the policy rate by 25 basis points. While inflation ticking up and labor market strength are clear reasons for the Bank of Canada to deliver, there are political, economic and technical reasons that may send CAD lower even with higher interest rates.

1. On a political front, it is the US President Trump that is raising the uncertainty, especially with his policies against the free trade agreement known as NAFTA. Concerns over the future of the NAFTA free trade agreement may alter the Bank of Canada policy guidance and lead Governor Stephen Poloz to sound very dovish during the press conference after the policy meeting before the sixth round of NAFTA talks. The dovish sound of the Bank of Canada Governor Poloz and markets on doubts of what will happen next is a bearish signal for CAD.
2. Looking at the short-term perspective for USD/CAD, the technical oscillators favor correction top the upside. The USD/CAD moved all the way down from C$1.2900 to C$1.2360 since December 19, 2017. While this move saw 23.6% Fibonacci retracement line at C$1.2465 broken with USD/CAD correcting towards 100-day moving average at C$1.2600, with USD/CAD, oscillators on short-term chart favor correction higher. Looking at the 15-minutes chart Slow Stochastics is already within the Oversold territory and the Relative Strength index is down, but reversing higher.

USD/CAD daily chart

With markets pricing in more than 80% probability of the Bank of Canada hiking rates tomorrow, it would be a major negative surprise for the Bank not to deliver. Nevertheless, the Bank of Canada can deliver a dovish rate hike as well, especially as massive CAD appreciation plays against its own inflation targets. 

USD/CAD 15 minutes chart