USD/CAD Surges As BoC Cut Rates

01/22/2015 9:00 am EST

Focus: CURRENCIES

Wednesday's surprise announcement from the Bank of Canada that it was lowering rates sent the greenback skyrocketing against the loonie, but the staff at ActionForex.com points out that there are also uncertainties around the positive developments and would be affected by weaker term of trade.

We got another central bank surprise on Wednesday. Totally unexpected, Bank of Canada lowers the overnight rate by 25bps to 0.75%. Correspondingly, the Bank Rate and Deposit Rate are lowered to 1.00% and 0.50%, respectively. BoC said in the statement that "this decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada." In particular, it also said that the "oil price shock increases both downside risks to the inflation profile and financial stability risks." And thus, the decision is intended to provide insurance against these risks and bring economy back to full capacity as well as inflation to target within projection horizon.

The base case for oil is around USD 60 per barrel and BoC expected oil prices are "likely to be higher" over the medium-term. Also, it noted that outside of energy sector, they are beginning to see the "anticipated sequence of increased foreign demand, stronger exports, improved business confidence and investment, and employment growth." But there are also uncertainties around the positive developments and would be affected by weaker term of trade. GDP is projected to slow to 1.5% in the first half and strengthen in second half to bring 2015 growth to 2.1% and 2016 growth to 2.4%. Inflation is still expected to return to 2% within the projection horizon gradually.

USD/CAD Mid-Day Outlook

Daily Pivots: (S1) 1.1994; (P) 1.2054; (R1) 1.2171; More...

USD/CAD surges to as high as 1.2317 after the surprised rate cut by BoC. Intraday bias remains on the upside and current rally should target 161.8% projection of 1.0181 to 1.1278 from 1.0620 at 1.2395 next. On the downside, break of 1.2048 minor support is needed to indicate short-term topping. Otherwise, outlook will stay bullish in case of retreat.

In the bigger picture, the long-term rally from 0.9406 is still in progress. Such rise is seen as the third leg of the pattern from 0.9056 low and would possibly now target a test on 1.3063 resistance. On the downside, break of 1.1278 resistance turned support is needed to indicate medium-term reversal. Otherwise, outlook will stay bullish.

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By the Staff at ActionForex.com

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