USD/CAD – Loonie Flight Stalls After BoC Rate Announcement

“Buy the rumor and sell the fact” played out rather well after the Bank of Canada (BoC) held rates steady as expected on Wednesday morning. Governor Poloz kept key interest rate at 0.5%, declaring that the previous two rate cuts were still stimulating an economy that is benefiting from solid household spending and a firm U.S. recovery.

The loonie managed to rally to an intraday high of $1.3155 on the announcement before running into a plethora of USD buyers, who continue to use weak commodity prices, especially crude oil (WTI $45.33) as their barometer of choice when speculating on loonies’ next price direction.

Heading into the rate announcement the loonie was already trading a rather volatile range-$1.3260 from $1.3185 in the Asia session. The BoC again confirmed that Canada’s resource sector continues to adjust to lower prices for oil and other commodities, with some spillover to the rest of the economy.

Even a weakening CAD is waiting to make a material impact on the economy. To date, it seems that it has not been a fast-acting economic solution for the commodity and interest rate sensitive country, but the bank remains optimistic, stating that the weakness in the Canadian dollar is helping absorb “some of the impact of lower commodity prices and facilitating economic adjustments.”

This time around the BoC noted that China and emerging markets also raise questions over global growth and reason enough why many economies seem to be struggling to find the path to growth.

It seems that the market is interpreting the statement as meaning the central bank is less likely to cut interest rates in the foreseeable future. The bank had cut rates in January and in July because of the sharp oil price drop.

The directional play of the CAD remains the same, handcuffed to crude oil prices and investors risk appetite. Now that the BoC is out of the way, investors will begin to focus on the Fed and gauge whether the rate differential argument further support the ‘big’ dollar.

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