Bank of Canada likely to hike again after today’s move
At a Glance
The desk sees potential for the Canadian dollar (CAD) to strengthen following the Bank of Canada's (BoC) recent rate increase. The BoC raised its policy rate by 25 basis points to 2.5%, indicating that this move is not likely to be an isolated hike, as policymakers express concerns over persistent inflationary pressures (per the full note ). Current market pricing shows a 50% chance of another hike in December, although the desk expects that any further tightening will materialize no earlier than the first quarter of 2027. This cautious but growth-oriented approach by the BoC aligns with favorable consumer spending data, propelling the outlook amid rising energy prices.
Key Takeaways
- 01The Bank of Canada raised its policy rate by 25bp to 2.5%, with indications of further hikes to combat inflation.
- 02Policymakers are cautious due to mixed economic signals, including rising unemployment at 6.5%.
- 03Current consensus for USD/CAD places the December 2026 target at 1.36, reflecting a tight range and varied firm outlooks.
- 04The desk's call anticipates CAD upside but keeps an eye on economic performance and inflation.
Full Analysis
What the desk is arguing
The desk anticipates that the Bank of Canada's recent hike may lead to future rate adjustments, supporting a bullish outlook for the Canadian dollar. Recent data, characterized by stronger-than-expected growth figures driven by consumer spending and an uptick in business investment, bolster this thesis (per the full note ). Policymakers have signaled that they will proceed with caution, balancing the need to combat inflation with economic strength.
The BoC's statement highlights rising costs that could pressure consumer prices, suggesting that inflation might be more persistent than expected. As noted, the Canadian unemployment rate has risen to 6.5%, presenting mixed signals about the overall labor market (per the full note ). Therefore, while the BoC’s rate hike is a step towards normalization, the potential for additional increases remains closely linked to future economic performance.
Where it sits in our coverage
The market consensus for USD/CAD places the median target at 1.36 by December 2026, within a range of 1.3500 to 1.4036. Notably, several firms provide insights: - Rabobank: Dec-26 target 1.3600 - TD: Dec-26 target 1.4000 - RBC: Dec-26 target 1.3400
Our desk’s outlook aligns with the lower end of this consensus spread, reflecting a more cautious view on CAD upside despite the recent rate hike.
How other firms see it
Most firms, including Scotiabank and CIBC, maintain a similar bullish stance on the CAD, pricing in strong growth but cautioning against overly optimistic inflation projections. Conversely, Nomura and HSBC appear more reserved, indicating a potential weakness in the CAD given the recent rise in unemployment figures.
The trajectory for USD/CAD will also be closely linked to broader market sentiment towards the BoC's tightening path and the performance of the U.S. dollar, particularly as global economic factors continue to evolve.
Market Implications
Traders should focus on the 1.36 target level for USD/CAD, watching for signs of further BoC rate hikes in upcoming meetings. Any unexpected data releases leading to a change in inflation expectations could shift market sentiment rapidly.
USD/CAD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Rabobank | Bullish | 1.36 |
ING | Bearish | 1.42 |
MUFG | Bullish | 1.34 |
From the original
Articles Bank of Canada likely to hike again after today’s move Published 15:05 FX Canada Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The BoC raised the policy rate by 25bp to 2.5% today, matching market expectations. Policymakers acknowledge risi
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