The Canadian dollar CADUSD strengthened against its U.S. counterpart on Wednesday as the Bank of Canada hiked interest rates by a full percentage point, but the rally was limited as investors reasoned the Federal Reserve could also hike by that magnitude.
The loonie was trading 0.4% higher at 1.2975 to the greenback, or 77.07 U.S. cents, after trading in a range of 1.2937 to 1.3060.
The Bank of Canada’s rate hike was the biggest in 24 years and surprised markets, which had been expecting the central bank to match the Federal Reserve’s latest move of three-quarters of a percentage point.
It left the BoC’s policy rate at 2.5%.
“Given the surprise, the loonie has not strengthened all that much,” said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York.
“I think the reason for that is that the 100 basis points move by the BoC has just been immediately projected onto the Fed. This brings out the risk aversion – chances of a central bank-induced recession have gone up and that’s generally bad for the loonie.”
Supporting the case for further aggressive Fed tightening, U.S. consumer prices jumped 9.1% in the 12 months through June, the biggest gain since November 1981.
The price of oil, one of Canada’s major exports, clawed back a small part of its recent declines. U.S. crude oil futures settled 0.5% higher at $96.30 a barrel.
Canadian government bond yields were mixed across a more deeply inverted yield curve, tracking the move in U.S. Treasuries.
The 2-year rose 8.9 basis points to 3.315%, while the 10-year was down 2.7 basis points at 3.163%.
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