Canadian dollar falls sharply on BoC rate hold, dovish statement
James Chen, CMT October 25, 2017 11:50 AM
The Canadian dollar fell sharply on Wednesday against other major currencies, even including a weakened US dollar, after the Bank of Canada held interest rates steady. While the rate hold was widely expected, the central bank issued a dovish-leaning statement that focused on caution amid uncertainties, including “geopolitical developments and fiscal and trade policies, notably the renegotiation of the North American Free Trade Agreement.” Also of particular concern were lagging wage growth in the labor market and lower projections for export growth, housing, and consumption. The statement concluded by stressing the central bank’s dependence on incoming economic data and highlighting that the "Governing Council will be cautious in making future adjustments to the policy rate."
Prior to the decision and statement, there had been speculation that the BoC may have become more dovish than it had been during the summer, when it raised interest rates back-to-back in July and early September. The degree of that expected dovish turn, however, was unknown prior to Wednesday’s statement. Now that the central bank has made its caution rather clear, the Canadian dollar is under much increased pressure, especially when viewed in contrast with hawkish expectations for US Federal Reserve rate hikes and an impending announcement of a new Fed Chair.
The Canadian dollar reaction to the BoC statement can readily be seen on the USD/CAD chart. Even with a weaker US dollar on Wednesday, the sharp drop for the Canadian dollar prompted a USD/CAD surge to a major resistance target at 1.2800. While a countermove reaction to the spike might shortly be expected, the currently apparent policy divergence between the Fed and BoC could boost the currency pair higher. With any sustained price move above 1.2800, the next major upside target is around the key 1.3000 psychological resistance level.
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