Canadian Dollar Eases After BoC Leaves Rates Unchanged

Talking Points

- The Bank of Canada left its benchmark overnight rate unchanged at 0.5%, as expected

- Its quarterly Monetary Policy Report implied little chance of a rate rise this year

- USDCAD strengthened marginally in the wake of the report

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The Bank of Canada left its benchmark interest rate unchanged at 0.5% Wednesday, while its latest quarterly Monetary Policy Report gave no indication that the Canadian central bank is in a mood to raise its overnight rate this year. In response, the Canadian dollar eased back, lifting USDCAD.

Chart 1: USDCAD 5-Minute Timeframe (January 18, 2017)

While the Bank of Canada raised its economic growth forecasts, it also noted the uncertainty created by the election of Donald Trump as US President. Trump, who will become President on Friday, is widely expected to loosen US fiscal policy and if he proves serious about weakening the US Dollar, the BoC might be forced to react.

So even if Trump’s policies lead to a rise in US interest rates, the BoC seems unlikely to follow suit until the Trump uncertainty subsides, and Canadian rates could remain at current levels throughout 2017. Indeed, a rate cut in Canada to 0.25% remains a possibility.

In comments after the Monetary Policy Report was released, BoC Governor Stephen Poloz said a rate cut remains on the table should downside risks materialize.

After a steep fall in USDCAD in the early months of last year, it has since risen – although it has given up some of those gains this year.

Chart 2: USDCAD Daily Timeframe (2016-2017)

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

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