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The Bank of Canada cut the interest rate to 0.75%. This was not expected by markets, to say the least. The Bank of Canada expects oil prices to stand below $60 per barrel and refers to the drop in prices as an “oil price shock”. The word “oil” appears 10 times in the statement.  

USD/CAD is shooting higher to 1.12260, from just below 1.21 before the publication. Update: USD/CAD is trading around 1.23. The peak so far has been 1.2317. This is yet another high since 2009.  In CAD/USD the 0.80 level looms.

Analysis:  USD/CAD: Running Away; Buy Dips targeting 1.30 – CBA

Oil prices hurt the Canadian dollar in two ways: falling revenues from exports and also lower inflation.

Here is part of the statement:

The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent. This decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada.

The drop in prices is clearly a negative for the Canadian economy. Growth in Canada is expected to slow in the first half but strengthen later on. They have lowered growth forecasts for 2015 but lifted them for 2016. The same goes for CPI expectations.

The statement includes oil prices 10 times and the phrase “oil price shock” twice. Here is the final part of the  statement:

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, support the sectoral adjustment needed to strengthen investment and growth, and bring the Canadian economy back to full capacity and inflation to target within the projection horizon

Opinion:  Buying USD/CAD – Morgan Stanley Chart Of The Week

Here is how it looks on the chart:

USDCAD flying high on shock rate cut from teh Bank of Canada January 21 2015