The US dollar is higher against the Canadian dollar on Wednesday morning as markets await the monetary policy meeting of the Bank of Canada while investors take stock of the coronavirus outbreak in China.
USD/CAD was higher by 10 pips (+0.08%) to 1.3079 with a daily range of 1.307 to 1.309 as of 9.30am GMT with the currency pair just off 5-day highs.
Expectations are low heading into today’s Bank of Canada meeting, where the rate statement is scheduled for 15.00 GMT with the press conference to follow at 16:15. Market pricing indicates a near zero-chance that the central bank decides to change interest rates in Canada today. That would mean the benchmark interest rate in Canada staying at 1.75%. In fact, most economists see the interest unchanged from 1.75% throughout all of 2020. If the meeting is to generate any volatility, it will be more likely caused by the BOC’s guidance on future growth and inflation.
In theory, the big headwinds facing the Canadian economy in 2019 have vanished at the start of 2020. The USMCA trade deal between Canada, the US and Mexico removes the direct threat of higher tariffs by its nearest neighbours and biggest trading partners. And, the easing of tensions between the US and China thanks to the phase one trade deal diminishes the more indirect threat of a global slowdown which would hurt demand for Canadian exports. A more positive tone from Governor Stephen Poloz, citing the above factors should be a positive for the Canadian dollar (negative for USDCAD).
On the flipside, the Canadian dollar is testing multi-year highs against he US dollar and other major currencies. If the BOC voice any concern about the strength of the Loonie, that could see the Canadian dollar turn lower (USDCAD move higher) after today’s press conference.
As a reminder, the Fed funds rate set by the US Federal Reserve is in a range of 1.5-1.75%. So looking at the interest earned alone, the US and Canadian dollars are perfectly equal. But it is expectations for how rates will change in the future that determines the direction of the exchange rate.