The Canadian dollar CADUSD weakened to a seven-month low against its U.S. counterpart on Wednesday as investors raised bets that the Bank of Canada’s tightening campaign is completed after the central bank’s latest move to leave interest rates on hold.
The Canadian central bank held its key overnight rate at a 22-year high of 5.0%, as expected, for a second straight meeting. It said the path to avoid a recession had narrowed, while leaving the door open to more rate hikes to tame inflation that could exceed its target for another two years.
“It was pretty much consensus that it would be this hawkish type hold because inflation has been stubborn to come down,” said Tom O’Gorman, director of fixed income at Franklin Templeton Canada.
“Eventually, we’re getting to that point where the rate hikes, they’re going to bite the economy and you are probably going to be close to a recession or recession-like type of growth.”
Money markets see a 44% chance of another rate hike over the coming months, down from roughly 60% before the rate decision.
The loonie was trading 0.4% lower at 1.3790 to the greenback, or 72.52 U.S. cents, after touching its weakest since March 15 at 1.3810.
“Sagging risk sentiment into the afternoon” added to pressure on the Canadian currency, said Michael Goshko, senior market analyst at Convera Canada ULC.
Wall Street fell after lackluster corporate results, while the U.S. dollar rallied against a basket of major currencies.
Canadian government bond yields were higher across a steeper curve but the move for shorter-dated maturities was less than for the equivalent U.S. Treasury yields.
The 2-year rose 2.9 basis points to 4.749%, while the 10-year was up 11.3 basis points at 4.131%.