No "Micro-Cut"

The Canadian Dollar has traded higher against the greenback over the last 24 hours. Along with the Dollar weakness seen in response to the inauguration of Joe Biden yesterday, the loonie was also helped lower by a rally in CAD as the Bank of Canada held its monetary policy rate steady. There had been a build up of easing expectations heading into the meeting, with market participants looking for a "micro-cut". However, the BOC opted to keep rates unchanged at current record lows of 0.25%.

Dovish Forecasts

Despite the bank keeping rates on hold at the current time, its forecasts and guidance were fairly grim. BOC governor Tiff Macklem warned that the current economic downturn was likely to worsen over Q1 2021 as a result of the lockdowns in place. Furthermore, uncertainty around how long the lockdowns would need to stay in place was also cited as a big risk factor. Macklem explained that those workers impacted most by the lockdown so far, were likely to experience further hardship and warned that the route out of lockdown depended solely on the success of the vaccination program underway.

Rates on Hold Until 2023

Given the uncertainty around the pandemic, the BOC judges that inflation is unlikely to return to the bank's 2% inflation target earlier than 2023, a year later than first projected. With this in mind, the BOC forecasts that its headline policy rate is likely to stay around current levels until such time.

Further GDP Hit in Q1

In its latest set of expectations for economic growth, the BOC forecasts that the pandemic will have caused the domestic economy to shrink 5.5% in GDP last year. While there was an uptick in activity during the wave one recovery in the summer and early fall, the subsequent second wave into winter has hit the recovery hard and is likely to worsen over Q1 this year. The BOC is looking for a 2.5% GDP contraction over Q1. If restrictions ease into the end of Q1, the BOC is confident the economy will recover quickly, bouncing back to 4.% growth over 2021 and 4.8% growth next year. However, this view is heavily reliant on the success of the vaccines and no third wave of the virus materializing.

Technical Views


The loonie continues to trade lower within the bearish channel which has framed the sell off since summer 2020. price is currently sitting on support at the 1.2626 level, with the channel low underpinning price also. However, the tone remains heavy and a further drop towards the 1.2525 level next looks likely. To the topside, 1.2961 remains the key hurdle for bulls.

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