Canadian Dollar Softer Following Bank of Canada Rate Cut

Above: File image of Governor Tiff Macklem. Source and copyright: Bank of Canada.

The Canadian Dollar fell after the Bank of Canada cut interest rates and communicated that it remained committed to further cuts in the coming months.

Losses in CAD were relatively constrained, however, as the 25 basis points cut met expectations that were already reflected by Canadian Dollar exchange rates and interest rate pricing.

The language in the accompanying communications was little changed from the previous edition and left the door open to further cuts, although there were no signs of alarm that would warrant an acceleration in the pace via a 50bp hike.

For CAD to have been sold more aggressively, the market would probably have wanted to see hints that the Bank was considering acting with more haste. "Officials stopped short of pulling the fire alarm, suggesting that cuts will proceed at a gradual pace," says Karl Schamotta, Chief Market Strategist at Corpay.

The Pound to Canadian Dollar exchange rate (GBP/CAD) reflected the 'dovish' slant to proceedings and rallied to a daily high at 1.7797. The Euro to Canadian Dollar (EUR/CAD) rising to 1.4976 and closing in on a third consecutive daily advance.

However, the Canadian Dollar advanced against the U.S. Dollar (USD/CAD down at 1.3507), with gains accelerating following a soft JOLTS report, underscoring how it is the Greenback and U.S. data pulse that remains the prime determinant of FX market developments.

Market-implied odds of rate cuts at the October and December meetings are holding firm at pre-release levels, but rate differentials are tightening at deeper time horizons, "suggesting that market participants expect Canadian policymakers to lag their U.S. counterparts in easing policy later next year," says Schamotta.