Canadian Dollar Rides Out Bumper Bank of Canada Rate Cut

Image © Bank of Canada

The Canadian Dollar's sensitivity to a 'dovish' Bank of Canada is on the wane.

The Canadian currency merely shrugged its shoulders at the Bank's decision to cut interest rates by 50 basis points on October 23 while indicating further cuts were in prospect.

"If the economy evolves broadly in line with our latest forecast, we expect to reduce the policy rate further," said the Bank in a statement.

Market pricing shows investors are positioned for another 50bp cut in December, making Canada's central bank one of the most aggressive cutters amongst its peer group.

"We were taken slightly by surprise by the dovish BoC, but markets had already priced in this 50bp move and the CAD curve has been skewed to the dovish side for some time. CAD was only marginally impacted by the decision," says Francesco Pesole, FX Strategist at ING Bank.

The decision to go with a hefty 50bp cut comes as the Bank sees inflation risks as subdued and is keen to bolster growth.

The Bank said it "took a bigger step" because Canada had returned to an environment of "low inflation" where risks to inflation undershooting are now "equally" of concern to inflation overshooting expectations.

Expectations for an aggressive path of rate cuts have meanwhile kept the Canadian Dollar under pressure over recent months, which is consistent with foreign exchange basics.

However, CAD has strengthened against most peers this week (apart from a rampant USD), signalling the Bank of Canada's approach to interest rates is now well anticipated and is therefore less of a downside threat.

"An outsized rate cut was a no-brainer, and the simple message from the Bank of Canada is that there’s more to come if events unfold as expected," says Avery Shenfeld, an economist at CIBC Capital Markets.

Last week, CIBC lowered its Canadian Dollar forecasts as it adjusted expectations to expect back-to-back 50bp rate cuts in October and December at the Bank of Canada.

The cut brings Canada's overnight rate to 3.75%.

"It would take a significant turn of events to stand in the way of another cut of that magnitude in December. That said, as has been its practice of late, the Bank has kept its options open by not signalling anything specific about the size of individual rate cuts ahead," says Shenfield.

He adds that the Bank's statement "plants a victory flag in the battle against inflation, which is now definitively expected to run around the 2% target."