USD/CAD Jumps as BOC Signals Dovish Shift amid Weaker Growth

Talking Points:

- BOC sees inflation risks tilted to downside after recent economic data disappoints.

- BOC sees growth somewhat lower than in July forecast.

- USD/CAD up from around C$1.2825 to near C$1.2900.

The Bank of Canada met today for its September policy decision, and while it kept its main rate on hold at 0.50%, the rest of its policy statement was anything but ‘more of the same.’ The BOC signaled a dovish shift today, which is not necessarily a surprise given recent data out of Canada: Q2’16 GDP declined by a -1.6% annualized quarterly rate.

Now, with the BOC saying that inflation risks have tilted to the downside and that the economic growth picture is a bit dimmer now than it was in July, it seems that markets should not dismiss further policy action this year. Accordingly, according to overnight index swaps (OIS), the probability of a BOC rate cut in October has increased from 6% yesterday to 19% after the policy meeting today.

See the DailyFX economic calendar for Wednesday, September 7, 2016

Chart 1: USD/CAD 1-minute Chart (September 7, 2016 Intraday)

Following the release of the BOC’s dovish-tinged policy statement, the Canadian Dollar weakened across the board alongside rising October rate cut expectations. USD/CAD traded from C$1.2823 ahead of the rate decision and was seen at C$1.2903 at the time this report was written. With FX volatility edging higher again, it’s the right time to review risk management principles to protect your capital.

Read more: US Dollar Dogged by Sinking Fed Hike Expectations

--- Written by Christopher Vecchio, Currency Strategist

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