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The Bank of Canada yesterday caught markets somewhat off-guard as it announced a fresh rate hike, the first since pausing its tightening campaign in January. The BoC hiked rates from 4.5% to 4.75%, their highest level in 22 years, and signaled the likely need for further hikes moving forward. Ahead of the meeting, only around 20% of analysts polled by Reuters were forecasting a hike. 
 

Inflation Persistent at Higher Levels

Explaining the move, Governor Tiff Macklem noted that demand in the economy had proved more resilient than projected earlier in the year, with inflation proving more persistent also. Tightness in the labor market and strength in the housing market were also cited as factors necessitating a rate hike at this juncture. On inflation in particular, the BoC noted its concern CPI could “get stuck materially above the 2% target.”
 

Further Hikes Expected

While the bank stopped short of committing to further tightening, it noted that it will be monitoring and evaluating inflation, wage growth, and demand moving forward. On the back of the hike, the market is now pricing in a further .25% hike in July with odds of a further hike in September creeping higher also. CAD was firmly bid on the back of the meeting and looks likely to remain underpinned moving forward.
 

Technical Views

CADJPY

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The rally in CADJPY, framed by the bull channel off the YTD lows has seen the market breaking out above the 104.52 level. While price holds above this level, the focus is on a further push higher, in line with bullish momentum studies readings, targeting 107.19 next. 

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