The US to Canadian dollar exchange rate has had a volatile few days around yesterday’s Federal Reserve announcement. The US currency started the week at 1.272 CAD but steadily climbed up as expectations built that the US central bank would finally give up on its “inflation is transitory” mantra and substantially expedite its rate hiking cycle. By the time of the release yesterday at 2 PM ET, the exchange rate had hit a 2021 high of 1.292, up a notable two pennies since the beginning of the week. Sure enough, the Fed projected three rate hikes coming in 2022, with two in the following year and two more in 2024. The news confirmed the expectation but did not go beyond it as some investors had feared and the markets breathed a sigh of relief as a result. The Canadian dollar rebounded some along with all other risk assets. USD to CAD is now at 1.277 (CAD to USD is at 0.783). Regardless, it is clear that the global era of easy money is coming to an end sooner than we realized even just a few weeks ago, and as other central banks catch up to the Bank of Canada’s perceived relative hawkishness, a major driver of Canadian dollar strength is now gone. As if to confirm the point, on the other side of the pond, today the Bank of England became the first major central bank to raise interest rates since the beginning of the pandemic. The Sterling rallied as a result.
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