Bank of Canada Guts Loonie – Shock and Awe for the Canadian Dollar
The Bank of Canada in a surprising move has cut interest rates by 0.25% and the Canadian dollar has tanked. The underlying cause of the drop in interest rates today is due to weak oil prices, which has reduced growth and inflation expectations in Canada. There is a run to the US dollar.
One of the attractive features of the Canadian dollar has been the fact that rates in Canada are higher than in the US. This differential has now been reduced.
The Bank of Canada is trying to nip the effect of falling oil prices in the bud. They are being proactive and have played their card. Clearly, the Bank of Canada is worried about growth because this is a shocking and unexpected move. If oil prices continue to fall to $30/bbl, another rate cut might be on the table and USD/CAD could it 1.30 easily. The thought of a rate hike is now completely off the table in the near term.
Inflation is a secondary thought at the moment, it is all about economic growth.
With the uncertainty of falling oil prices, everything is on the table in terms of next steps.
It will be a highly watched wait and see approach by the Bank of Canada. All upcoming economic data reports will be scrutinized and over analyzed. Expect more volatility in USD/CAD, especially because another rate cut could be on the table at any time.
Once jobs and GDP data have stabilized after accounting for the effect of falling oil prices, the Bank of Canada will be in a better position to have a more certain and predictable growth forecast.
The trend remains the friend for the US dollar.
Thanks,
Rahim Madhavji | Knightsbridge Foreign Exchange
T: 416-274-9332 | T: 1-877-355-KBFX (5239) ext. 101 | Trading Floor: 416-479-0834 | [email protected]
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By Admin | January 21, 2015 | Daily Update |
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