We wrote in our North American commentary yesterday morning that, “it seems investors have begun to lock-in profits on long CAD positions ahead of today’s Bank of Canada policy meeting.” They will certainly be glad they did as the Canadian Dollar slumped to the bottom of our one-day performance table on Wednesday. USD/CAD rose from a low immediately prior to the interest rate announcement of 1.2555 to a high just under 1.2660. AUD/CAD jumped more than three-quarters of a cent to 0.9845 whilst NZD/CAD rose from 0.9200 to a best level just under 0.9270. Overnight in Asia, the CAD has improved from its worst levels and USD/CAD is down around a quarter of a cent from yesterday’s high with GBP/CAD still below 1.80.
As expected by the vast majority of analysts, the Bank of Canada left its overnight target rate of interest unchanged at 1.25%. Its Statement noted that, “interest rates remain very low relative to historical experience. This is because the economy is not yet able to remain at full capacity on its own. Furthermore, the sustainability of this level of activity is not assured; although we expected the economy to moderate in the second half of 2017, that moderation has extended into early 2018 and has been more pronounced than expected.” Blaming this on two exceptional factors – changes in mortgage rules and transport bottlenecks – the BoC said, “Accordingly, we expect a strong rebound in the second quarter after a lacklustre first quarter, with an average growth rate of about 2 per cent in the first half of the year and a return to near-potential growth thereafter. Fiscal stimulus, both provincial and federal, is playing a role in this forecast. We will be monitoring the data for the second quarter very closely in the weeks ahead.”
In terms of forward guidance, and though Governor Poloz personally doesn’t like the concept, the Statement went on to say that, “Assuming our forecast remains on track, it is Governing Council’s view that interest rates will need to move higher over time to keep inflation on target… Most of our deliberations, therefore, concerned the appropriate pace of interest rate increases. As we have said repeatedly in the past, this is an intensely data-dependent process of risk management.” Weighing up the risks around capacity constraints, inflation dynamics, wages and the sensitivity of the economy to interest rates given the high level of household debt, The BoC concluded that, “higher interest rates will be warranted over time… but the Governing Council will remain cautious with respect to future policy adjustments, guided by incoming data.” The Canadian Dollar opens in Europe this morning with USD/CAD in the low-1.26’s and GBP/CAD in the low-1.79’s.