The Bank of Canada (BoC) left its main policy levers untouched in July, with the overnight rate unchanged at 0.25% and LSAPs continuing at a minimum of $5 billion per week. Economists at TD Securities expect the USD/CAD pair to find a floor at 1.35 though this level should be broken later this year.
Key quotes
“The Bank of Canada kept the overnight rate and LSAP unchanged at 0.25% and $5 billion/week but introduced new guidance that rates would remain at the ELB until slack is absorbed. Forecasts showed a 7.8% contraction/5.1% rebound in 2020/21, with inflation remaining below target through 2022.”
“Although the conditional forward guidance lends itself to some ambiguity, the big picture does not change; the Bank’s forecasts are conservative but by no means outlandish, and the Bank is settling in for a long stretch of very low interest rates. We look for the overnight rate to remain at 25 bps until at least mid-2022, and expect QE to continue until 2021H1.”
“Perky risk sentiment and a soggy USD has benefited the loonie. While we anticipate a near-term USD/CAD retest of the 1.35 level, it’s likely to offer a floor rather than an extension lower. We expect the 1.35 floor to give way later this year, paving the way for a shift back to the low-1.30s.”
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