The Bank of Canada kept rates at 4.5%. This was in line with market expectations and its previous communication. By the middle of the year, the BoC expects inflation to moderate to 3%. It will continue to monitor the economy and is prepared to increase rates if needed.
The 2-year note is considered a good proxy for central bank policy. The spread between the Canadian and US 2-year notes (top chart) is insightful. It has charted a higher trough (HT) followed by a higher peak (HP). I.e., the spread is trending up in favour of the US 2-year note. This is not surprising. There is a stark contrast between the Fed and the BoC in terms of policy. BoC communication has about confirmed rates have peaked in Canada, whilst the Fed remains on an aggressive tightening policy in its efforts to curtail inflation.
USDCAD (bottom chart) traded in a sideway symmetrical triangle pattern from October 2022 to mid-February this year. However, the data coming out of the US in February has been much hotter than anticipated, forcing the Fed to become more aggressive in its tightening bias.
Given this, and the resulting spread increase, the USDCAD has broken up and out of the consolidation pattern. A relative difference in tone between the two central banks, and the uptrend in the 2-year note spread means that the USDCAD has a tailwind behind it.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.