Today is a big day, as the Bank of Canada (BoC) publishes its interest rate decision and US consumer prices will be released for June.
Now the Canadian Dollar (CAD), also known as the "Loonie", could be facing some volatility in the foreign exchange market.
What can we expect from the Bank of Canada's interest rate decision?
The BoC kept its key interest rate at 0.25 percent for an extended period and only raised it for the first time by 25 basis points on 2 March 2022. This was followed by a 50 basis points increase on 13 April, and another 50 basis points rise on 1 June, to reach the current level of 1.50 percent.
Despite the recent interest rate hikes, Canada is not immune to inflationary pressures. The latest Canadian inflation figures released by the BoC show a 12-month gain of 7.7 percent. The Canadian inflation figures are only slightly lower than the inflation figures we see in the Eurozone and the United States.
According to an article by MarketWatch on 12 July 2022, the US Federal Reserve (Fed) monetary policy is on track to deliver its aggressive interest rate hikes and wants to avoid the stop-and-go monetary policy of the 1970s. Instead, the Fed's primary target is to get inflation under control.
This could prompt the BoC to follow a similar path of a series of aggressive interest rate increases, starting with a potential 75 basis point step in July. That would raise the key interest rate to 2.25 percent. A 75 basis points increase would be in line with what is expected from the Fed in July.
What does this mean for the USD/CAD?
The release of record-level US consumer price data in July could push the USD/CAD and result in a stronger CAD if it confirms or beats the expected US inflation data. According to a Bloomberg survey, the consensus for the June data is for a 12-month gain of 8.8 percent.
If the Bank of Canada moves forward with a convincing interest rate move of 75 basis points and sets the expectation for further interest rate increases, this could potentially strengthen the Loonie further.