USD/CAD edging lower as BOC takes a sanguine view on Loonie

<p>As expected, the first major central bank “decision” of the week was not much of a decision at all. Earlier this morning, the Bank of Canada opted to leave interest rates unchanged at 0.50%, as all 11 primary dealers surveyed by the Wall Street Journal expected.</p>

As expected, the first major central bank "decision" of the week was not much of a decision at all. Earlier this morning, the Bank of Canada opted to leave interest rates unchanged at 0.50%, as all 11 primary dealers surveyed by the Wall Street Journal expected.

In a bit of an unexpected development though, the central bank refrained from "jawboning" its currency lower. The Loonie has surged higher by more than 1,400 pips against the US dollar over the last two months, and many analysts expected that BOC would take this month’s monetary policy statement as an opportunity to warn against continued strength in Canada’s currency.

As it turns out, the Bank of Canada did nothing of the sort, implicitly giving a green light to loonie bulls. Instead, the central bank noted that the appreciation in the currency was due primarily to a rebound in the price of commodities, prominently including oil and concluded that, "both the price of oil and the exchange rate have averaged close to levels assumed in the January MPR." This sanguine, "as expected" view toward the currency suggests that the BOC would not be unduly upset with continued appreciation in the loonie.

The other big uncertainty on the horizon for the BOC is the upcoming Canadian federal budget release. In characteristically noncommittal language, the monetary policy statement noted that, "[a]n assessment of the impact of the upcoming federal budget's fiscal measures will be incorporated into the Bank's April projection. All things considered, the risks to the profile for inflation are roughly balanced." In other words, the BOC wants to have more information from both the fiscal and market front before deciding on its next move.

Market Reaction: USD/CAD

While there was nothing too radical in the BOC’s statement, traders took the lack of concern about the strength of the Canadian dollar as a green light to push the currency higher. As we go to press, USD/CAD trading near 1.3290, down over 100 pips from pre-BOC levels. The drop has completely unwound yesterday’s oversold bounce, and it leaves USD/CAD precariously close to the 200-day MA, a critical technical juncture. The last time USD/CAD traded below its 200-day MA was back in 2014, and if that level gives way, a quick move down toward 1.3200 or even the 1.30 handle could be seen in the coming days.


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