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Jan 26, 2022

Loonie sinks after Bank of Canada's surprise hold

At the lower bound of rates, deflation is a bigger problem than inflation: Ed Devlin


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The Canadian dollar took a sharp turn lower against the greenback after the Bank of Canada unexpectedly announced Wednesday it’s keeping its key lending rate unchanged at 0.25 per cent.
The loonie sank about half a cent to 79.13-cents U.S., from its intraday high of 79.62-cents U.S., after the central bank released its decision, before bouncing to trade higher on the session.
It’s an unusual day for North American currencies as the Bank of Canada and U.S. Federal Reserve both had monetary policy announcements. 
“For today, the messaging from both central banks was hawkish. But while the Fed is leaning into market expectations, the [Bank of Canada] disappointed more than a few market participants by not moving,” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets, in an email. 
Overnight index swap data showed there was a roughly 70 per cent chance the Bank of Canada would hike today. 
Both central banks are now expected to kickoff their hiking cycles in March, according to Bloomberg data. 
“Volatility generally rises at the beginning of a rate hike cycle, so we’d be cautious about FX exposure in the months ahead. The situation with crude prices underscores that view as well, given how tight extant inventory is,” Rai said. 
He still expects some weakness ahead for the loonie. Even after both rate decisions and with as many as six rate hikes priced in for the Bank of Canada, he predicts the Canadian dollar will end the year valued at around 77-cents U.S.