Today's Bank of Canada (BoC) decision may have some read over to the US, ING’s FX analyst Chris Turner notes.
BoC rate policy is going to move USD/CAD
“Two-thirds of economists polled on the subject expect a 50bp rate from the BoC – where the BoC would emulate peers in New Zealand, who have delivered back-to-back 50bp rate cuts. Money markets also price 44bp of Canadian rate cuts today. Our thinking goes as follows: if the BoC cuts by 50bp, briefly taking the Fed-BoC policy rate spread to a hugely wide 150bp, the BoC will have a strong view that the Fed cuts 25bp next week.”
“Under this scenario, the Canadian dollar weakens, but also the US dollar could soften a little as expectations of a 25bp Fed cut are firmed up. Should the BoC surprise and only cut by 25bp, it will be a signal that the BoC has strong doubts about next week's Fed cut.”
“For example, we doubt the BoC is ready to leave the Fed-BoC rate spread at 150bp at year-end (BoC cuts by 50bp to 3.25%, Fed leaves rates at 4.75%), where such a wide rate differential would send USD/CAD upwards of 1.43. If indeed the BoC only cuts by 25bp then the US dollar might catch a bid on the view that next week's FOMC meeting really is a toss-up after all!”
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