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February 13th - Regan Capital analyst Skyler Weinand stated that weak US inflation data in January will not increase the likelihood of a Federal Reserve rate cut in the coming months, due to stronger-than-expected labor market data released earlier this week – 130,000 new jobs were added in January, and the unemployment rate was 4.3%. The Fed "simply cannot cut rates right now, given that the economy has just created six-figure jobs." Weinand expects the Senate to confirm Warsh as Fed Chair, succeeding Powell, but doubts his ability to build consensus on rate cuts. "We may not see any changes to the Feds policy rate this year." The CME FedWatch Tool shows that investors are currently pricing in at least two rate cuts this year.February 13th - Lower-than-expected inflation data released on Friday sent U.S. Treasury prices soaring, fueling investor expectations for three Federal Reserve rate cuts in 2026. The yield on the two-year U.S. Treasury note, most sensitive to central bank policy changes, fell as much as 6 basis points to 3.40%, a new low since October, before recovering slightly. Following the data release, traders priced in a rate cut of approximately 63 basis points this year—implying a roughly 50% probability of a third 25-basis-point cut before the end of the year, on top of the two already priced-in cuts, compared to 58 basis points priced in on Thursday. Earlier this week, traders had already stopped fully pricing in a 25-basis-point rate cut mid-year in response to the January non-farm payroll data, postponing their bets to July. Wall Street banks that had previously predicted a March rate cut have also pushed their expectations back to later in 2026.February 13 - Paul Ashworth, chief economist for North America at Capital Economics, said that it is important to emphasize that although the core PCE inflation measure is usually about 0.3 percentage points lower than the CPI on average, our calculations show that the core PCE inflation measure, which is preferred by the Federal Reserve, rebounded to 3.0% in January.February 13th - Seema Shah, Chief Global Strategist at Principal Asset Management, stated that the current situation is still insufficient to justify a near-term rate cut by the Federal Reserve. The continued strength of the labor market provides policymakers with a reason to maintain interest rates, and further slowing of inflation in the second half of the year, as the impact of tariffs fades, should reopen the door to further easing.Christopher Hodge, an analyst at Natixis: In the coming months, we expect inflation to continue to be higher than expected, but not to accelerate, which will allow the Federal Reserve to cut interest rates on weak labor market data.

Bank of Canada, Canadian Dollar, USDCAD, Inflation

Larissa Barlow

Apr 14, 2022 10:26

The Bank of Canada (BoC) chose to increase its benchmark policy rate by 50 basis points (bps), the highest increase in more than two decades. Additionally, the BoC announced that quantitative tightening (QT) would begin on April 25th, as the central bank seeks to combat three-decade high inflation. According to the policy statement, "interest rates will need to rise further" because inflation has exceeded previous predictions for 2022. Notably, inflation predictions were revised significantly upward, with the Bank of Canada now expecting inflation to hover around 6% for the most of the first half of 2022.

 

Canada, like other central banks, has struggled to curb price pressures. In January, the Bank of Canada forecasted first-quarter inflation of 5.1 percent. However, it is on track to exceed 6%, much beyond the BoC's aim of 2%. Due to Russia's invasion of Ukraine, economists worldwide have been obliged to revise their inflation and growth forecasts.

 

The BoC also confirmed its balance sheet reduction plans, with the central bank opting not to replace maturing bonds. QT is scheduled to begin on April 25, with around a quarter of the government debt acquired during the pandemic (approximately C$350 billion) maturing during the next 12 months. 

USD/CAD 1 Hour Chart

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Despite the Bank of Canada's rise, the USDCAD continues to trend higher. The cross briefly declined in nine consecutive sessions, with the Canadian Dollar's rise supported by increasing oil prices. This decrease peaked on April 5th near 1.2402, and has since recovered significantly. A fall in risk appetite has resulted in a significant bid for the USD in recent days, with the US Dollar Index gaining for the last ten days. With the USDCAD firmly on the rise, any dips may be bought as we approach the May FOMC meeting, at which the Fed is likely to hike rates by 50 basis points and announce plans for balance sheet reduction.