Strong data boosts CAD

The Bank of Canada made an unexpected decision to raise interest rates by 25 bps, increasing its target for the overnight rate from 4.5% to 4.75%. This move comes in response to a series of positive economic indicators for Canada, including a robust job market, higher GDP, and elevated inflationary prints. To gain a comprehensive view of the economic data, refer to the Financial Source’s economic data tracker.

Of particular note is the 4.4% inflation rate, surpassing economists’ projections. The concern over sustained inflation above the 2% target has been a key driver behind the BoC’s decision to hike interest rates. Despite lower energy costs, goods price inflation has risen, while services price inflation remains at an elevated level.

CAD Outlook

The removal of the language indicating a readiness to raise rates further from the previous meeting in April most probably suggests that the Bank of Canada is shifting towards a more data-dependent approach. Their focus will be on monitoring whether high inflation starts to recede. If inflation remains persistently high, it will continue to be a concern for the BoC and strengthen the Canadian Dollar. Currently, the CAD has been on an upward trajectory in line with the positive data readings in May. Traders should monitor inflation-related economic data points for potential short-term opportunities in the CAD. The Bank will carefully assess core inflation dynamics, CPI inflation outlook, inflation expectations, wage growth, and corporate pricing behavior to achieve the inflation target.

Tracking CAD performance

For a comprehensive view of the CAD’s performance, refer to the CAD index.

The CAD has exhibited strength in tandem with the favorable May data readings. Keeping an eye on inflation-related economic indicators will help traders identify potential opportunities in the short term. Read the full Bank of Canada rate statement.