Loonie above 1.3500, on BoC’s statement

Bank of Canada pushed aside its rate hike desires as the economy slows, with the dropping of the tightening bias matching expectations.

The policy setting was held at 1.75%, as expected. While the abandonment of the mild tightening bias opens the door to both rate hikes and rate cuts, depending on the flow of data, we’d note that officials maintained their view that the economy will rebound from the current soft patch.

The Bank lowered its estimate of the neutral range to 2.25% to 3.25% (was 2.50% to 3.50%). Officials have repeatedly stated that any change in the neutral estimate is a procedural move. Of course, with the lower bound now at 2.25%, a smaller rate rise is needed to get back to neutral than was previously the case, which could be construed as dovish.

Meanwhile, officials maintained that rates remain accommodative, which would presumably be inappropriate if the economy was not suffering from the lingering oil shock headwinds. The dropping of the mild tightening bias provides more room for the Bank to maneuver as the economy gradually recovers, and puts the BoC in line with the Fed and ECB. Yet expectations remain on a rate increase late in 2020.

Meanwhile, USDCAD soared to 1.3520, levels last seen in early January, from 1.3440 following the BoC announcement, where there were no policy changes, though the Bank’s statement, came in with a decidedly dovish slant, removing any hint of a tightening bias looking forward.

The CAD is liable to remain under pressure, despite higher oil prices (BoC said “Last year’s oil price decline and ongoing transportation constraints have curbed investment and exports in the energy sector”), as the BoC shifts to a neutral bias.