What had been expected for awhile seems to have taken Wall Street unawares, economists have been saying that the recent inflation numbers were too big ignore and that it this was not just global economies playing catchup to fill the void from the pandemic. Today, Federal Reserve official James Bullard said inflation was stronger than anticipated and it would take the central bank several meetings to figure out how to pare back stimulus. Wall street promptly responded by falling 1.25%. The Fed had reiterated on numerous occasions that the spike in inflation was temporary and would fall back after things went back to “normal” and it seems that this is not the case, the FED has now changed its call on rate hikes from 2023 to 2022, it’s still a year from now. A lot can happen.
The Canadian dollar is weaker based on this news and this might be classified as good news for the Bank of Canada. It is trying to find ways to limit any further hikes in house prices and household debt, both of which are at all time highs. It’s usual method is to raise interest rates but this was unavailable as the Canadian dollar was too strong to the USD, hovering around the 1.20-1.21 levels, if the BoC had hiked the CAD would get even stronger impacting Canada’s exports. Now that the CAD is weaker, this gives the BoC the opportunity to raise rates at least once and perhaps a second time, don’t be surprised.
Expect the CAD to trade on the weak side today.