Bank of Canada Holds Rate Steady, USD/CAD Advances

The Bank of Canada held the benchmark interest rate at 0.25% this month in order to encourage a sustainable recovery, and said that the central bank retains “considerable flexibility” in the management of monetary policy even as borrowing costs remain at its lowest level since the institution was established in 1934.

The statement accompanying the rate decision stated that the risks for the economy are ‘roughly balanced” but went onto say that the outlook for inflation remains slightly skewed to the downside as the central bank anticipates price growth to hold below the target until the second-half of 2011. Moreover, the BoC reiterated that “the main risks are a more protracted global recovery and persistent strength in the Canadian dollar that could act as a significant further drag on growth and put additional downward pressure on inflation,” but said that the recovery ‘profile’ remains consistent with the October forecast as the economy emerges from the recession. In addition, the central bank repeated “the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target,” and noted that economic activity will be “more solidly entrenched” as the expansion in monetary and fiscal policy feeds through the real economy.

The dovish commentary following the rate decision pushed the USD/CAD higher as investors scaled back expectations for a BoC rate hike, with the exchange rate pushing back above the 50-Day SMA (1.0564) to reach a high of 1.0618. At the same time, the rise in risk appetite has also helped to prop up the U.S. dollar as it remains the most popular funding currency next to the Japanese Yen, and the dollar-loonie may continue to push higher going into the Asian trade however, as the 30-minute RSI approaches overbought territory, we may see the pair fall back towards the 120-SMA at 1.0542 to hold the November range.