Canadian Dollar Treads Higher on BOC Rate Decision

BOC Rate Decision, USDCAD, COVID-19, Recession – Talking Points:

• The BOC left its benchmark overnight rate at 0.25%, as expected
• COVID-19 virus trajectory to dictate pace of economic comeback
• BOC ushers in a new era with Tiff Macklem taking the helm

The Bank of Canada left its overnight interest rate unchanged at 0.25% Wednesday morning. Markets largely expected the move from the BOC and former Governor Poloz stated previously that the current interest rate was as low as possible. USD/CAD shifted higher as the news of the interest rate decision crossed the wires. The Canadian Dollar has made strides against the greenback in recent weeks, as a global risk rally continues amid tremendous support from central banks despite the troubling macro themes. Canadian Dollar strength continued on the back of the BOC move with USD/CAD dipping under the 1.3500 mark.

USDCAD (1-Min Price Chart)

Source: IG Charts

Tiff Macklem, the newly appointed Governor, took the helm of Canada’s central bank this week, but the BOC’s policy statement likely does not reflect any major changes in thought from Macklem, with his tenure being so recent. Still, market participants are not expecting a fundamental shift in policy with Macklem at the wheel. That being said, markets will be watching Macklem closely in the following months for clues as to what changes he will bring to the BOC.

The main drivers, such as the current COVID-19 pandemic and the resulting economic fallout to the labor market and broader economy are expected to remain the driving force behind policy decisions for the foreseeable future. Virus impacts seem to have leveled off however as the policy statement from the BOC notes that the economy avoided its most serious scenario from the April Monetary Policy Report. Falling oil prices were also noted in the BOC policy statement along with decreased investment in Canada's energy sector, which remains a significant segment of the economy.

Crude Oil (Daily Price Chart)

Source: IG Charts

The technical backdrop for the Canadian Dollar appears bullish against the US Dollar. Recent breaches through several technical levels see USD/CAD primed for a possible drop further in the near-term. However, while markets remain in a risk-on stance, the global backdrop remains precarious and tensions between the US and China, along with continuing protests throughout the United States may seep into risk appetite.