Loonie Hits Key Support as Rate Hike Expectations Rise

The Canadian dollar is testing key support at 1.3800 after the Bank of Canada's (BoC) decision to hold interest rates at 2.25%.

While a break below this level could lead to further downside, BBH's Elias Haddad views the market's reaction as too aggressive given core inflation near the BoC's target and ongoing excess supply in the economy.

The BoC delivered a hawkish hold yesterday, warning of increased upside risks to inflation. As expected, the policy rate remained at 2.25% for a seventh consecutive meeting.

However, markets have brought forward expectations for a first 25bps hike from January to December and firmed up odds of 75 to 100bps of tightening over the next twelve months.