USD/CAD Surges to 5-Year Highs Following Surprise Interest Rate Cut

The greenback surged to a fresh 5-year high against the Loonie, after the Bank of Canada surprised market participants with a surprise interest rate cut on Wednesday. Traders were caught off-sides which generated significant volatility pushing the currency pair higher on robust momentum.

The Bank of Canada cut interest rates by 0.25%, leaving the target for the overnight rate at 0.75% as they took out insurance against the oil price drop. A 1.00% rate was unanimously expected, so the move was a surprise. The growth and inflation outlook remained constructive, however, and the composition of risk surrounding the inflation outlook was also little altered. The Governor expressed his willingness to cut further if needed.

GDP in the first half of this year is now seen at only 1.5% before improving to 2.5% by Q4. Growth was cut to 2.1% in 2015 and lifted to 2.4% in 2016 while 2014 is now expected at 2.4%.

The surprise rate cut came with a crucial development in terms of the policy outlook, as the Bank recast the household leverage issue. The stimulus now potentially reduces household leverage as it keeps economic growth from underperforming and unemployment from rising, maintaining the ability of households to service debt. A soft landing remains the Bank’s projection for the housing sector.

Given Governor Poloz’s pledge that the Bank can do more if it is necessary to mitigate the risk of the economy being stuck below full capacity growth, another rate cut remains a very real possibility in the near term. Another insurance rate cut would further reduce the risk that the economy stalls out so far below full capacity that the BoC is stuck in extraordinary easing mode over the medium term.

The technicals on the USD/CAD are robust with price action breaking about a long term downward sloping trend line. The next level of monthly target resistance is seen near 1.3060. Momentum is positive with the MACD (moving average convergence) index generating a buy signal.

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