Canadian Dollar Sees Welcome Relief from Bank of Canada Signpost


Image © Bank of Canada


The Canadian Dollar strengthened following the Bank of Canada's March decision.

The Bank cut interest rates by 25 basis points because of heightened trade tensions and tariffs imposed by the United States, but warned it would be more cautious going forward.

Hints that it might be ready to pause cutting interest rates helped the domestic currency, which strengthened against most G10 peers.

The Bank says tariffs will likely slow the pace of economic activity but risk increasing inflationary pressures in Canada.

The Bank said recent surveys suggest a sharp drop in consumer confidence and a slowdown in business spending as companies postpone or cancel investments.

This is having a knock-on effect on employment growth, with the Bank saying that job growth looks to have stalled and that heightened trade tensions could disrupt the recovery in the jobs market.

However, deflationary pressures will offset the inflationary nature of trade tariffs.

The Bank said it remains cautious about inflation reemerging, and it "will be carefully assessing the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs."

"It does not offer any new guidance on where policy is heading, but our assumption is that the pace of cuts will slow after today’s move, and forecast just one further rate cut coming in the second quarter," says James Knightley, Chief International Economist at ING Bank.

With the prospect of further cuts not guaranteed, there is space for CAD to rise on the shoring up of interest rate expectations if the Bank pauses.

"The worst CAD days might be behind us," says a new strategy note from Société Générale strategist Olivier Korber.

He thinks USD/CAD put options are the way to play a strengthening in CAD, amidst expectations for improved political conditions in Canada and falling U.S. yields.

"Despite trade fears and the ongoing retaliatory escalation, USD/CAD is not breaking above 1.45, and short CAD positioning is showing signs of erosion in both futures and options," Korber wrote in a note to clients on Monday.

Mark Carney taking charge of the country is also seen as positive. "Carney’s election is an opportunity to engage in trade negotiations with the U.S. on a new footing ahead of the April 2 tariff deadline," Korber explains.

He adds that a strong Liberal election result or signs of easing trade tensions could provide further CAD support.


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