USD/CAD Loonie Rises After Bank of Canada and Higher Oil Prices

The Canadian dollar advanced versus the USD after the Bank of Canada announced the benchmark interest rate would remain unchanged at 0.50 percent. The USD/CAD traded below 1.33 as the loonie also got a boost of oil prices that rose despite higher crude inventories in the U.S.

The Bank of Canada (BoC) was largely expected to hold rates unchanged as the central bank has shifted some of the burden of guiding the economy to the Liberal government elected last year. As part of the campaign promises investing in infrastructure to stimulate the economy will be close when the government releases its first budget on March 22.

The decline in the price of oil had forced the BoC to act proactively with two interest rates cuts in 2015, but with the benchmark rate at 0.50 percent there is little room for conventional monetary policy left in the central bank’s arsenal. After a rapid decline of crude prices to start 2016 the BoC was in the spotlight but opted to wait for the release of the budget and the subsequent impact before resorting to more unconventional measures.

The USD/CAD depreciated 1.20 percent in the last 24 hours. The pair touched highs of 1.3447 ahead of the Bank of Canada decision and the U.S. oil inventories. Both indicators boosted the CAD as the BoC did not add to the interest rate divergence with the U.S. and West Texas jumped over 5 percent after gasoline inventories declined signalling better than expected demand. Crude oil inventories are still at record high, but the oil producer summit said to be held on March 20 by Saudi Arabia, Qatar, Iraq, Venezuela and Russia have kept the price of oil stable.

Canadian Fiscal Stimulus Could be a Pilot Program for Growth

The aftermath of the credit crisis in 2008 saw a coordinated effort from central banks to provide liquidity and pushed rates to historic lows. Easing monetary policies were used to boost growth. The unified front was broken when the U.S. Federal Reserve announced it would end its quantitative easing (QE) program and eventually hike rates. Almost a year after the end of QE announcement the Fed hiked rates in a historic move. Fed Economists could not have foreseen the rapid drop in crude prices and the emerging stock market rout that have put the tightening path on hold.

With a record low interest rate the Bank of Canada is close to exhausting its conventional tools. Central banks such as the Bank of Japan (BOJ) and the European Central Bank (ECB) have been in similar situations and even the Fed; all opted to introduce QE programs that have so far had mixed returns. Canada, thanks in part to the timing of the elections has a new government that was well aware of the economic challenges ahead and made it part of its campaign to highlight what is what proposing to do. Fiscal stimulus was part of the platform that was elected last year and will have a chance to shine on March 22 when the Federal budget is released.

There is a lot of optimism surrounding the loonie, but it could all be a mirage if the Federal government does not impress with its stimulus plans and the oil output freeze does not materialize leaving no floor for crude prices. The Bank of Canada offered a mixed review of Canadian economic outlook. Commodity prices remained the biggest risk, while U.S. growth remains moderate and Canadian exporters are set to benefit from a weaker currency in the short term.

CAD events to watch this week:

Thursday, March 10
7:45am EUR Minimum Bid Rate
8:30am EUR ECB Press Conference
8:30am USD Unemployment Claims
8:30 am CAD NHPI m/m
8:30 am CAD Capacity Utilization Rate
4:15 pm CAD BOC Gov Poloz Speaks
Friday, March 11
8:30 am CAD Employment Change

*All times EST