USD/CAD Canadian Dollar Higher After Central Bank Holds Rate

 | May 25, 2017 12:27AM ET

The Bank of Canada kept rates unchanged but statement was not all dovish

The Canadian dollar is higher against the US dollar after the Bank of Canada (BoC) kept rates unchanged at 0.50 percent. The release of minutes from the Fed’s May meeting was full of surprises, but still felt short of the market expectations which are pricing in a rate hike in the upcoming June 13/14 Federal Open Market Committee (FOMC) meeting.

The BoC managed to balance its dovish assessment of the economy with the potential opportunity as there is still excess capacity. The housing market remains a concern as it is too early to tell if the latest moves by the provincial government in Ontario after following the lead of British Columbia and the problems at Home Capital Trust have had a real impact on prices. The central bank has put rate cuts off the table since earlier this year, but there are no real possibilities of a rate hike until 2018. Trade will remain a challenge as the US has begun the 90 day period before holding a renegotiation meeting with Canada and Mexico.

The Fed Minutes released today brought insights about the central bank’s next steps on rate policy and its balance sheet reduction plans. Fed members discussed that a rate hike would be appropriate soon. The market agrees, already pricing in a 83.1 percent probability of a rate hike in the upcoming June FOMC meeting, although through to its cautious nature the Fed did add that it would have to be dependant on strong economic data. Central bank officials are calling the slowdown in the first quarter as transitory and expect the US economy to recover. The Fed surprised with a lot of details on their plans to shrinks their balance sheet. A three month increasing cap seems to be the plan going forward until reaching normalization.

Oil prices had initially risen with the combination of the bigger than expected drawdown in US weekly inventories and the upcoming meeting between Organization of the Petroleum Exporting Countries (OPEC) and other major producers in Vienna to discuss the extension to the production cut agreement put in place in January of this year. The agreement has stabilized prices but rising US production has kept crude at around current levels which is why an extension and a possible further decrease in supply might be needed.