The BOC surprised with not cutting the rates and also sending a not-so-dovish message, allowing some breathing space for the Canadian dollar. Here are two reasons:
Here is their view, courtesy of eFXnews:
Against Nomura’s expectations, the Bank of Canada (BoC) left its policy rate at 0.50%.
Overall, today’s decision, indicates that the BoC seems to be suggesting there is not much it can do to help the economy. We believe there could be two explanations for the surprising decision. 1) The BoC has been told by the government that a large fiscal stimulus is on its way and that it will be big enough to limit downside risks to the growth outlook. 2) The BoC believes that the risk to financial stability from a rate cut outweigh the positive impact it would have on growth.
In any case, both suggest that the BoC believes that the effectiveness of monetary policy is very low. At this point it is tempting to say that the cut will only be delayed, but today’s decision suggests that the hurdle for the BoC to provide further stimulus is much higher. As such, we believe the BoC will remain on hold, leaving fiscal policy to stimulate the economy.
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