A BoC rate hike could strengthen the Canadian dollar further if there is a large enough gap with the Fed's interest rate policy.

The Bank of Canada (BoC) officially announced an interest rate hike on June 7. The rate hike was 25 basis points, from 4.50% to 4.75%.

The Central Bank signaled the possibility of raising it again in the near future. Yet, the previous consensus predicted that the BoC would not change its policy at its regular meeting on June 7.

The rate hike caused the Canadian Dollar to strengthen on June 7. The neighborhood currency duo, USD/CAD fell to its lowest level in a month before crawling up to around 1.3360.

UDS/CAD

The BoC's recent statement expressed that previous rate hikes have not had a significant impact on economic activity. They noted several conditions in the Canadian economy in the first quarter of 2023 that could potentially boost inflation. These include a sustained rebound in service sector consumption, as well as more persistent market demand than before.

The BoC will continue to monitor these aspects to make the best decisions for the national economy.

"Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation. In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the inflation target," said the central Bank of Canada in its official press release.

The Canadian Dollar rate currently appears to be strengthening limitedly in response to BoC's unexpectedly hawkish stance. But, analysts think the Loonie's strength could extend further, especially if there is a sizable gap with the Fed's next rate policy expectations.

"The attractive risk-adjusted carry can keep CAD in investors' favour for longer," says Francesco Pesole, FX strategist at ING Bank, "fresh BoC tightening means that USD/CAD may trade closer to 1.25 than 1.30 by year-end."

"A quarter percentage point rate hike to 4.75% could potentially put levels below 1.33 in play for USD/CAD that have been out of the market since mid-February," says Joe Manimbo, Senior FX Analyst at Convera.