Shift In USD/CAD Behavior To Gather Pace On Hawkish BoC Rhetoric

Trading the News: Bank of Canada (BoC) Interest Rate Decision

The Bank of Canada (BoC) interest rate may yield a limited reaction as the central bank is expected to keep the benchmark interest rate a 0.75%, but the accompanying policy statement may heighten the appeal of the Canadian dollar should Governor Stephen Poloz and Co. show a greater willingness to further normalize monetary policy.

The BoC may prepare households and businesses for higher borrowing-costs as ‘growth is broadening across industries and regions and therefore becoming more sustainable.’ In turn, USD/CAD may continue to trade to fresh yearly lows if the central bank talks up bets for another rate-hike in 2017.

Nevertheless, Governor Poloz and Co. may merely attempt to buy more time as ‘he Bank’s three measures of core inflation all remain below 2 per cent,’ and more of the same from the BoC may spark a near-term correction in the dollar-loonie exchange rate especially as the Federal Open Market Committee (FOMC) ‘expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated.’

Impact that the BoC rate decision has had on USD/CAD during the previous meeting

July 2017 Bank of Canada (BoC) Interest Rate Decision

USD/CAD 10-Minute Chart

The Bank of Canada (BoC) increased the benchmark interest rate for the first time since 2010, with the central bank largely endorsing a hawkish outlook for monetary policy as the ‘output gap is now projected to close around the end of 2017, earlier than the Bank anticipated in its April Monetary Policy Report (MPR).’ The fresh comments suggest Governor Stephen Poloz and Co. are on course to implement higher borrowing-costs over the coming months as ‘the Bank expects inflation to return to close to 2 per cent by the middle of 2018.’ The Canadian dollar rallied following the 25bp rate-hike, with USD/CAD pushing below the 1.2800 handle to end the day at 1.2748.