Fundamental Analysis

USD/CAD Canadian Dollar Lower After BoC Holds Interest Rate


The Canadian dollar traded at a three month low after the Bank of Canada (BoC) kept the benchmark interest rate intact as expected and delivered a dovish assessment of the economy and NAFTA uncertainty.

The Canadian central bank had hiked rates twice in 2017 and given the pace of growth in the first half of the year a third rate hike was a probability near the end of the year. Now the BoC seems unsure about how solid that growth really is, in stark contrast of their views in July and September. The bank also mentioned the possible impact higher rates could have on Canadians, who now hold record levels of debt.

The BoC was not all doom in their report with a positive outlook for the future but gone is the urgency on raising rates replaced by a data dependency that Fed watchers will recognize. Stephen Poloz mentioned that every monetary policy meeting is a live one, but from watching Chair Yellen and the FOMC investors are now expecting a more cautious Canadian central bank going forward. Trade decisions and other factors outside of its control could put the BoC in a different path form the one it was on a month ago.

The USD/CAD rose 0.96 percent on Wednesday. The currency pair is trading at 1.2796 and briefly went over the 1.28 price level after the Bank of Canada (BoC) held the interest rate unchanged and delivered some concerns about the economy prompting investors to discount the probability of a rate hike coming this year.

The Bank of Montreal was one of the first to push back their forecast for the next rate hike to come in March of 2018. The U.S. Federal Reserve is anticipated to lift the Fed funds rate in December widening the gap between Canadian and US borrowing costs.

West Texas Intermediate is trading at $51.91. The price of crude fell on Wednesday with a surprise rise in weekly US crude inventories. The first buildup in oil inventories showed a rise of 900,000 barrels. The forecast was calling a fourth consecutive drawdown of 2.2 million barrels.

The rise in inventories undid some of the work of Saudi Arabia whose efforts to extend the Organization of the Petroleum Exporting Countries (OPEC) and other producers agreement to cut production have kept oil prices stable. The increase in US oil rigs have offset the cuts in production, with only geopolitical and other disruptions pushing prices higher throughout the year.

Market events to watch this week:

Thursday, October 26
7:45 am EUR Minimum Bid Rate
8:30 am EUR ECB Press Conference
8:30 am USD Unemployment Claims
Friday, October 27
8:30 am USD Advance GDP q/q

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