The Canadian Dollar sent Lower by BoC, More Losses Likely

• Pound to Canadian Dollar exchange rate: 1.6301
• US Dollar to Canadian Dollar exchange rate: 1.3271
• Euro to Canadian Dollar exchange rate: 1.4124

The Canadian Dollar has been the worst-performing major currency over the course of the past 24 hours.

The CAD took a dive sharply against major competitors after the Bank of Canada communicated it is willing to cut interest rates in the near future.

As expected the Bank of Canada (BoC) left the overnight rate unchanged at 0.50% at their Wednesday January 18 policy meeting.

The central bank acknowledged the “firm” employment growth, but quickly pointed out that “indicators still point to significant slack in the labour market”.

The BoC added that Canada “continues to operate with material excess capacity” which explains why measures of core inflation are below 2%.

Inflation is expected to move close to the 2% target “in the months ahead and remain there throughout the projection horizon” as energy prices rise and the impact of low food prices dissipate.

However, uncertainty about the global outlook was front and centre in the policy statement, particularly with regards to US policy.

While fiscal stimulus from Donald Trump was deemed to be good the BoC warned that the tightening of monetary conditions would weigh - i.e higher interest rates at the Fed pushing up the cost of doing business in Dollars.

This would likely weigh on growth.

"The Bank emphasized a wide confidence band around its forecasts, particularly given both upside and downside risks related to US fiscal and trade policy.  Even with an assumed add from US fiscal stimulus boosting growth south of the border, Canadian GDP is only expected to receive a modest 0.1 ppt lift as ongoing competitiveness challenges and tighter financial conditions provide some offset," says Josh Nye, an economist with RBC Capital Marktes.

Canadian Dollar Comes in for Mention

Of note was the BoC’s dim view on the strengthening Canadian Dollar which they say is “exacerbating ongoing competitiveness challenges and muting the outlook for exports”.

“The BoC was also not happy with the strengthening Canadian dollar relative to other currencies because it is exacerbating ongoing competitiveness challenges for exporters. All in all, the stand pat decision coupled with cautious statements should not be surprising,” says Paul-André Pinsonnault at National Bank of Canada.

Governor Poloz said that since last October’s MPR the handful of data releases have been encouraging in the sense that they were much in line with the BoC’s projections.

This was enough for the Governing Council to not consider rate cuts this time around. However, uncertainties remain high, notably regarding trade policy.

In that context, the Governor suggested that the option of adopting more monetary stimulus remains on the table.

Depending on what the incoming U.S. administration does, Pinsonnault says the BoC’s policy stance could change significantly in the months ahead.

Turning to the Canadian Dollar's next moves from here, analyst Adam Cole at RBC Capital Markets believes the outlook for CAD is now negative.

"Yesterday’s daily close above trendline resistance at 1.3173 signals that the correction in USD/CAD has come to an end, targeting 1.3294 and 1.3388 initially on the topside. RBC is below consensus for today’s November manufacturing sales release."