Summary:

• BOC keep overnight range unchanged at 1.0%
• BOC postpones 2% inflation target achievement until H2 2018
• Canadian dollar falling sharply

Recently Bank of Canada (BOC) rate decisions have been accompanied with high levels of volatility for the Canadian dollar, and this afternoon’s event was no different. An unexpected hike last time out sent the Loonie soaring with USDCAD dropping in excess of 200 pips in a matter of seconds following the announcement and whilst there was no change in the overnight rate today there has been a significant market reaction. 

 The Canadian dollar is falling against all of its peers barring the AUD. Source: xStation

The decision to keep the overnight rate at 1.0% was widely expected (see our banks preview here) but a substantial lowering of the inflation forecast has moved the market. The Central Bank now doesn’t expect inflation to hit target until the second half of 2018, with the reason for this pushing back of forecasts down to the rise in the Canadian dollar. 

The accompanying statement contained several points of interest as shown below:

• BOC pledges caution on future rate increases
• Sees economy running close to potential over next two years
• Lifts 2017 and 2018 GDP forecasts to 3.1% and 2.1% from 2.8% and 2% respectively
• Labour market slack provides room for growth without inflation
• NAFTA talks create substantial uncertainty for BOC outlook
• There could be room for more economic growth than projected without inflation rising materially above target

Overall this is quite dovish despite the upgrades to growth, with these revisions being qualified explicitly as not necessarily causing higher inflation. The initial reaction has seen a large move lower for the Canadian dollar with USDCAD surging higher by some 140 pips in the minutes following the release. 

 The Canadian dollar dropped sharply on the announcement with USDCAD surging higher by more than 100 pips. Source: xStation

Longer term the market could be carving out a deeper formation with a possible inverse head and shoulders forming. The head comes in around 1.21 and a possible neckline is around today’s high at 1.2775. A break above here would trigger the setup and could see a large move to the upside should it play out in a textbook fashion. 

 A longer term inverse head and shoulders may be forming on USDCAD. Source: xStation