Brown Brothers Harriman’s Elias Haddad reports USD/CAD is trading near 1.3735, with resistance at the 200-day moving average. The Bank of Canada (BoC) held its overnight rate at 2.25% but dropped guidance that policy is appropriate, signalling a live hiking bias if energy prices stay high. BBH still favours long Canadian Dollar (CAD) crosses as a hedge against a persistent energy shock.

Guidance shift turns BoC more hawkish

"Yesterday, the Bank of Canada (BoC) kept the target for the overnight rate at 2.25% for a third straight meeting (widely expected). The statement highlighted the familiar stagflation dilemma facing all central banks noting that “risks to growth look tilted to the downside. At the same time, inflation risks have gone up due to higher energy prices”."

"The real signal was in the guidance shift. The BoC scrapped its previous guidance that “the current policy rate remains appropriate” implying that policy is now live for a hike."

"Specifically, the BoC warned it “will look through the war’s immediate impact on inflation but if energy prices stay high, we will not let their effects broaden and become persistent inflation”."

"USD/CAD is up near 1.3735, with the next major resistance offered at the 200-day moving average (1.3802). "

"We still favor long CAD on the crosses as a good hedge against a more persistent energy price shock. Canada gets the terms of trade boost and has fiscal space to absorb some of the growth drag to domestic demand."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)