USD/CAD - Canadian Dollar Hammered by BoC

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The Canadian dollar ended a two-week rally spectacularly following a dovish Bank of Canada policy statement and Monetary Policy Report (MPR). USD/CAD soared to a peak of $1.3207 from a low of $1.3075 prior to the Bank of Canada news. It consolidated those gains in a $1.3150-$1.3176 range in an active overnight session.

The Bank of Canada did as expected when they left interest rates unchanged at 1.75% at the October 30 meeting. However, the tone of the statement was more dovish than expected. The BoC said The outlook for the global economy has weakened further since the Bank’s July Monetary Policy Report (MPR). Ongoing trade conflicts and uncertainty are restraining business investment, trade, and global growth."

The statement went on to forecast "below-potential" domestic economic growth in the second half, blaming continued adjustments in the energy sector and ongoing trade conflicts. The BoC even suggested that Canadian dollar strength was part of the problem when it noted "Commodity prices have fallen amid concerns about global demand. Despite this, the Canada-U.S. exchange rate is still near its July level, and the Canadian dollar has strengthened against other currencies." However, the risk of BoC intervention in the currency is slim to none.

The Canadian dollar underperformed all the G-10 major currencies along with the Japanese yen. The G-10 currencies rallied after the Federal Open Market Committee statement and Chair Jerome Powell’s press conference and extended their gains overnight.

The Federal Open Market Committee (FOMC) was universally expected to chop the federal funds range to 1.75-2.00% from 2.00-2.25%, and that is what it did. Most analysts believed the Committee would indicate that the rate cut would be the last cut for the next few months and Fed Chair Jerome Powell confirmed that view, but a tad more hawkishly than expected. Typically, a steady Fed rate policy in an environment when the major central banks are still easing would boost the U.S. dollar. Not this time. During his press conference, Powell emphatically said that rates would only rise if inflation was rising and "we don’t see that happening." The U.S. dollar climbed, led by gains in New Zealand and Australian dollars. The Canadian dollar didn’t see any benefit and underperformed.

Overnight, USD/JPY extended losses as the Fed outlook knocked 10-year U.S. Treasury yields down to 1.750% from 1.839%. The Bank of Japan policy meeting was mostly a non-event. They left rates unchanged but hinted that further policy easing was still on the table.

There is a lot of U.S. data due today, but any impact will be short-lived due to yesterday’s FOMC statement. The same holds for the Canadian data. However, there is a risk of USD/CAD selling due to month-end portfolio re-balancing flows.

Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
Learn how KnightsbridgeFX can help you save up to 2% when buying or selling US dollars compared to your Canadian bank’s rates – click here to compare bank rates