USDCAD Testing the Upside After the 50 bps BOC Dovish Rate Cut
USDCAD has surged more than 4 cents higher this month, climbing above 1.38 but recently the surge stalled as markets awaited the BOC rate decision. The Bank of Canada lowered interest rates by 50 basis points and markets are expecting another rate cut of 25 bps in the next meeting, with the BOC pricing for the December 11 meeting suggests at 25% chance of another 50 bps cut.
Since late September, the USD/CAD exchange rate has climbed by more than 4 cents. The case for a 50 basis point rate cut by the Bank of Canada (BoC) gained momentum and the currency pair continued its upward movement following the release of Canada’s inflation data, which showed another drop in the headline rate, with the pair peaking at 1.3849 yesterday. However, after this steady rise, the price has started to level off below a key resistance zone. This comes as markets anticipate a dovish BoC policy meeting, given the recent weak economic indicators from Canada.
USD/CAD Chart H4 – MAs Acting As Support
Bank of Canada October Policy Meeting
Bank of Canada Rate Decision:
- Cut interest rates by 50 basis points, lowering the overnight rate from 4.25% (as expected).
- Markets had priced in a 94% chance of a 50 bps cut.
- The OIS market was predicting a rate of 2.60% by the end of 2025 before the decision.
Key Highlights from the BoC Statement:
- Further rate cuts are expected if the economy evolves as forecasted.
- Timing and pace of future cuts will be based on incoming data.
- Decisions will be made one meeting at a time.
- The labor market remains weak, with population growth outpacing hiring.
- U.S. growth is expected to be stronger than earlier predictions, while China’s outlook remains subdued.
- Euro area growth has been soft but should see modest recovery next year.
- The Canadian economy continues to operate with excess supply.
- GDP growth forecasts: 1.2% for 2024, 2.1% for 2025, and 2.3% for 2026.
Macklem’s Statement:
- More rate cuts are anticipated in the future.
- The larger cut was made because inflation has returned to the 2% target, and the goal is to keep it close.
- Price pressures are no longer broad-based.
- The focus is on achieving economic stability (“sticking the landing”).
- Household spending and business investment have picked up but remain soft.
- Further rate cuts are expected to support demand and maintain inflation at target levels.
- Residential investment is expected to rise, driven by strong housing demand and increased spending on renovations.
- Exports should remain strong due to robust U.S. demand.
- The risks surrounding the inflation forecast are considered balanced.
In summary, the Bank of Canada delivered a 50 basis point rate cut as expected, signaling further reductions may follow based on economic conditions. While inflation has returned to target, the labor market remains weak and economic growth modest. The BoC aims to support demand and maintain inflation stability, with future decisions guided by incoming data. Economic growth in key regions like the U.S. and Europe is expected to recover, supporting exports, while domestic factors like housing demand are also expected to boost the economy.