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The Canadian dollar continues to suffer and even reach lows against the dollar following the surprising rate cut with USD/CAD already flirting with 1.24.

Is it just a surprising one-off? Probably not, says the team at Nomura:

Here is their view, courtesy of eFXnews:

The Bank of Canada surprised by cutting its policy rate by 25bp to 0.75%, the first move in 4 years. The BoC justified the cut by saying that “the oil price shock increases both downside risks to the inflation profile and financial stability risks.” The Bank’s policy action is intended to provide insurance against these risks. The BoC also revised sharply its growth forecast.

We believe that the BoC would not have ended its longer period of rates stability unless it believed that there were threats that inflation could fall below the target for a long period of time. However, we think that there are some downside risks to these forecast because: 1) The assumption of oil prices around $60 seems a bit optimistic given we are stabilizing around $50, 2) it shows a quick recovery later this year, supposing little persistence in the oil shock and 3) despite the widening of the output gap, core inflation was revised slightly higher. Nevertheless, as we highlighted above, the forecast seems to have been based on some optimistic assumptions.

As such, we see downside risks to the BoC forecast. With this in mind, we believe the BoC is likely to cut again in the near future, could be as early as the March meeting, unless oil prices rebound.

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