Three scenarios and their implications for USD/CAD – TDS

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Economists at TD Securities discuss the Bank of Canada (BoC) Interest Rate Decision and its implications for the USD/CAD pair.

Hawkish (25%)

25 bps hike. BoC hikes to 5.25%. Bank remains concerned that sticky inflation will delay the normalization of wage/inflation expectations, risking a wage-price spiral. October MPR still projects a soft landing, but inflation target takes longer to achieve. No change to guidance, keeping options open. USD/CAD -1.0%.

Base Case (65%)

Open-ended hold. Bank holds at 5.00% and leaves the door open to further hikes. Bank cites widespread evidence that rate hikes are working to slow demand, with sharp downgrade to 2023 GDP forecast as CPI is revised higher for 2023 and 2024. Bank leaves guidance unchanged, repeating pledge to hike further if needed. USD/CAD -0.2%.

Dovish (10%)

Dovish hold. BoC holds overnight rate at 5.00% but signals that the window for hikes has likely closed. Statement notes that higher interest rates have worked, with excess demand fading rapidly and economy tracking toward mild recession. Revised guidance states Bank will continue to assess the outlook for inflation, but does not repeat pledge to hike again if needed. USD/CAD +0.5%.