Canada Surprise Rate Hike

• The Bank of Canada raised its overnight rate by 25bps to 4.75% after pausing the previous two meetings.

• This could cause the Federal Reserve to follow suite next week during its June meeting.

• The daily and weekly charts are both making defined moves. 

The Bank of Canada surprised everyone by increasing its overnight rate by 2% after skipping on doing so its past two meetings. Policy makers thought that the current policy was not restrictive enough to bring its target level of 2% inflation back in line. The current level of core inflation in the Canadian economy sits between 3.5-4%. This is now the second central bank after the Reserve Bank of Australia increased its overnight rate by 25bps on Tuesday. The Federal Reserve may also follow suit as the economic data does continue to come in hotter than expected. 

Technically speaking, the Canadian dollar is in bullish territory and has been for the past year or so against the U.S. dollar above its 200-period SMA, and above the volume point of control on the volume profile at 1.27. However, since October it has been in a wide sideways channel respecting the AB=CD harmonic patterns as outlined in both charts below. 

The daily chart is currently in a 61.8% - [100%-161.8%] AB=CD harmonic pattern to the downside along with fair value gaps/low volume nodes also to the downside from 1.34590 -1.35630. The weekly chart shows a clear picture of the 100% extension down towards the 200-period SMA. If the Federal Reserve does move forward and hikes short term rates by 25bps next week it will cause an increase in the value of the U.S. dollar sending the CAD lower. 

Daily Chart

Weekly Chart