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USD/CAD Falls as Bank of Canada Holds Key Rate Unchanged

USD/CAD Falls as Bank of Canada Holds Key Rate Unchanged

Varun Jaitly, Contributor

Talking Points:

  • Bank of Canada maintains overnight interest rate at 0.50%
  • BOC sounds optimistic on inflation trends moving forward

The Canadian Dollar traded higher after the Bank of Canada announced it would maintain the current overnight rate at 0.50 percent. USD/CAD dropped nearly 1.3 percent after the move as markets may have been disappointed in the lack of action from the BoC. In their official statement the central bank cited a plethora of concerns, many of which stemmed from the relationship between Canada’s economy and both the oil market, and the US. Despite citing weakness in the US during the fourth quarter of 2015 as well as low oil prices, the Canadian central bank determined that its key measures for monetary policy showed no immediate need for a rate cut.

The BOC’s main measures for monetary policy adjustment are its analysis of inflation seen through CPI, as well as maintaining a floating or “flexible” exchange rate. With regards to CPI, the current inflation rate remains near the bottom of the Bank’s target range. The central bank said in their statement that the deflationary effects of low oil prices and economic slack would remain a hindrance to inflation growth. However, the central bank believes these effects to be temporary and expects inflation to return to 2% by early 2017. CPI is currently at 1.4 percent year over year.

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