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HUGE CAD Sell-off after BoC Axes Rates By 50bps



CAD was slammed in the aftermath of the Bank of Canada’s latest rate decision. The bank opted to follow in the footsteps of the Fed yesterday, axing rates by 50bps to 1.25%. In the accompanying statement released by the BoC, it said that “the Covid-19 virus is a material negative shock to the Canadian and global outlook”, before noting that “monetary and fiscal authorities are responding”, a nod of approval to the touted coordinated global monetary policy response that we are seeing.


Moreover, the statement added that the BoC stands ready to adjust monetary policy further if required; thus, like the Fed, the BoC has left the door open to further rate cuts.


USDCAD popped more than 70 pips higher in the aftermath of the event. This is because everything about the decision was more dovish than expected. Firstly, the cut itself was larger than expected; markets had been pricing 40bps worth of easing, implying that markets thought there was still some 40% probability that the BoC would choose to cut rates by only 25bps. Secondly, the BoC explicitly left the door open to further rate cuts if needed, meaning more cuts are likely in the near future.


In fairness, the move higher in USDCAD was exacerbated by strong US data, which came out at the same time as the BoC’s decision. But all in all, very dovish stuff from the BoC. Expect more cuts to come in future meeting and, likely, more CAD downside as a result.


Tomorrow we will be getting more insight into the thinking behind the BoC’s latest rate decision when Governor Poloz gives remarks. Given the larger than expected cut and highly dovish tone of the statement, markets will be expecting a very dovish sounding Poloz.


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