Canadian Dollar Rallies from 4-Year Lows as BoC Cuts Rates to 3.25%

December 12, 2024 - Written by Tim Boyer

STORY LINK Canadian Dollar Rallies from 4-Year Lows as BoC Cuts Rates to 3.25%

The Canadian dollar exchange rates rallied on Wednesday following the Bank of Canada policy decision.

The move had been priced in and the central bank also signalled a more cautious stance on further rate cuts which triggered a paring of short positions.

The US Dollar to Canadian dollar exchange rate (USD/CAD) retreated to 1.4125 from 4-year highs near 1.4200.

The Pound to Canadian dollar (GBP/CAD) exchange rate also retreated from 2-week highs above 1.8100 to trade around 1.8015.

According to Monex Europe Senior Fx Market Analyst Nick Rees; “While this is supporting loonie upside for now, we are inclined to think that tariffs will warrant substantial further policy easing in 2025, regardless of the bank's latest statements, which should ensure that this current bout of CAD strength is short-lived.”

The Bank of Canada cut interest rates by 50 basis points to 3.25% at the latest policy meeting which was in line with consensus forecasts.

According to the central bank there are a substantial number of domestic elements that will have a potential impact on growth and inflation pressures within the economy.

The bank also pointed to the possibility of US tariffs which it described as; “a major new uncertainty.”

It was slightly more cautious over further action; “Governing Council has reduced the policy rate substantially since June. Going forward, we will be evaluating the need for further reductions in the policy rate one decision at a time. Our decisions will be guided by incoming information and our assessment of the implications for the inflation outlook.”

Governor Macklem added that the bank anticipates a more gradual approach to monetary policy if the economy evolves broadly as expected.

MUFG commented; “Upside risks from here therefore may stem more from Trump and his policy announcements in January rather than the BoC’s actions. Still, even with a cautious message today from the BoC, we see limited scope for CAD recovery and we see scope for USD/CAD extending further to around the 1.4500-level before any sustained recovery beyond Q1 can materialise.”

According to Scotiabank; “Given that a 50bps rate cut is more or less fully priced in, the CAD may stage a mini, short-covering rebound on the news.”

ING considers that the decision is an indicator of Fed action next week; “Our thinking goes as follows: if the BoC cuts by 50bp, briefly taking the Fed-BoC policy rate spread to a hugely wide 150bp, the BoC will have a strong view that the Fed cuts 25bp next week.”

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TAGS: Canadian Dollar Forecasts