The BOC surprised again by cutting the interest rate to 0.50%. While not everybody was surprised, this was certainly not the base case scenario. Did the Iran deal play a role also in this decision?
USD/CAD leaps to a new 6 year high at 1.2923 and the rage continues.
The BOC previously surprised in January with a cut to 0.75% but that was later described only as an “insurance policyâ€. This time it looks different. The output gap is wider and there are downside risks to inflation.
In addition, the BOC cut the 2015 growth forecast to 1.1% and stated that the recent export weakness is puzzling.They even see Canada as being in recession right now. Here is what they say about the economy (emphasis mine):
The Bank’s estimate of growth in Canada in 2015 has been marked down considerably from its April projection. The downward revision reflects further downgrades of business investment plans in the energy sector, as well as weaker-than-expected exports of non-energy commodities and non-commodities. Real GDP is now projected to have contracted modestly in the first half of the year, resulting in higher excess capacity and additional downward pressure on inflation.
The Bank of Canada was expected to leave the interest rate unchanged at 0.75%, but there was no 100% consensus before the event. The weak GDP from Canada also led many to expect that even if policy is left unchanged, Poloz and company could hint on a rate cut in the not so distant future. On the other hand, employment was quite positive.
USD/CAD was on the rise before the publication, trading just under 1.28. It had already reached a high of 1.2809 beforehand. The cycle high is 1.2834 and is a key line to watch.
The pair got its boost from a relatively upbeat speech from Fed Chair Yellen, which helped the USD across the board. In addition, Canadian manufacturing sales disappointed by rising only 0.1%, contrary to 0.3% expected.
Here is how it looks on the chart. The pair is now stabilizing on high ground, just under 1.29. The peak has been 1.2923. The previous 2015 high of 1.2834 turns into support but the technical break is clear, given the magnitude of the leap and the magnitude of the decision.
