Canada Hikes, No Promise for Next Month

The Bank of Canada hiked its overnight target 25 bp to 0.50%, as widely expected. A Reuters poll showed all primary dealers expected it and expect a hike at next month's meeting as well (July 20). However, the Bank of Canada's statement is somewhat more neutral, The BOC also took measures to restore the normal operating band to 50 bp.

The uneven economic recovery globally and what the BOC called "the possibility of renewed weakness in Europe" is one of the factors that might give the central bank pause. Given the substantial uncertainty surrounding the global outlook, the BOC cautioned "any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments."

This would seem to suggest the bar for a July hike is an easing of the tensions in the global capital markets. The Canadian economic recovery is unfolding thus far in line with policy makers' expectations. The Bank of Canada notes that policy is still accommodative. On a trade weighted measure, the 7% decline in the Canadian dollar since mid-April also imparts some degree of accommodation as well.

Initial resistance for the US dollar is seen near CAD1.0550-60. A move above there could see CAD1.0720-40. Last week's high was set on Tuesday near CAD1.0850. Support is seen near CAD1.0460.