Canadian Dollar (CAD) Benefits from BOC Interest Rate Decision but Pares Gains on Thursday

The Canadian Dollar advanced over the course of the week due to a number of factors. The commodity-driven currency initially benefited from an uptick in crude oil prices and better-than-expected domestic growth data. The North American nation was shown to have expanded by an annualised 2.4% in the fourth quarter of last year, smashing expectations for growth of 2.0%. On the month in December, the Canadian economy grew by 0.3% rather than the 0.2% expected. Scotiabank said of the result; ‘More than half of that growth is driven by strong inventories accumulation. The Canadian consumer performed well over the quarter, but trade dragged on headline growth.’ Canada’s Industrial Product Price report was also more positive than anticipated, revealing a -0.4% month-on-month dip in January – half the decline forecast.

Later in the week the Canadian Dollar received another boost against peers like the Pound, Euro and US Dollar as the Bank of Canada delivered its interest rate decision. The central bank shocked financial markets at its last gathering by cutting borrowing costs by 25 basis points, taking the benchmark interest rate to 0.75%. The move was a reaction to the recent plummet in oil prices and many investors feared that another revision to borrowing costs could be on the horizon. However, the BOC put these concerns to bed on Thursday by asserting that the recent action should be enough to counter the impact of the declination in oil prices and implying that the central bank has no plans to cut rates further in the months ahead. The BOC stated; ‘Financial conditions in Canada have eased materially since January, in response to the bank’s recent monetary policy action and to global financial developments. We judge that the current degree of monetary policy stimulus is still appropriate... In light of these developments, the risks around the inflation profile are now more balanced and financial stability risks are evolving as expected.’

However, the Canadian Dollar pared gains as the week continued and investors focused on the upcoming US Non-Farm Payrolls report. As the US is Canada’s largest trading partner, improved economic conditions in the former nation tend to boost the prospects of the latter. That being said, a buoyant US labour market is likely to encourage the Federal Reserve to bring forward its interest rate hike timeline – a prospect which would reduce demand for higher-yielding currencies like the ‘Loonie’.