The US dollar is higher against the Canadian dollar on Thursday morning after the Bank of Canada opted to keep interest rates unchanged but took a surprisingly cautious tone about the outlook for the Canadian economy.
USD/CAD was higher by 28 pips (+0.21%) to 1.3163 with a daily range of 1.313 to 1.317 as of 9.30am GMT with the currency pair breaking out to new highs year-to-date.
The Loonie was the top faller across major currencies yesterday after what economists have described as a “dovish hold” from the Bank of Canada. That means the bank decide to hold interest rates at existing levels but the language they used to describe the reason for doing so implied a greater chance of cutting interest rates in the future than rising them. Governor Poloz described “increasing excess capacity” that puts downward pressure on inflation. If inflation falls too far, central banks will tend to want to cut interest rates to encourage inflation to return to roughly 2%.
USD/CAD rose to fresh 2020 highs above 1.31 during the press conference of Governor Poloz, when instead of talking about the resilience of Canada’s economy – he instead focused on the downside risks. The main concern appears to be the global trade war between the US and China, as well as earlier disagreements between the US and Canada. The central bank appear worried that the trade conflicts are damaging business confidence and want to be ready to step in front of any economic weakness to stop it becoming more entrenched.
The result of yesterday’s meeting is that the BOC have opened the doors to a rate cut later this year. Some bank analysts are predicting that could now happen in April.
So having made this decision to keep interest rates at 1.75%, the Canadian benchmark interest rate stays equal to that of the United States, which is 1.5-1.75%. The different between the two economies, which could now put more downward pressure on the CAD (upwards pressure on USD/CAD) is that markets expect lower rates this year from Canada but for US interest rates to remains roughly the same, with a tendency to think they might be lower by the end of the year.