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USD/CAD: Canadian dollar plunges as BOC shocks market with rate-cut

H.S. Borji
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The Canadian dollar plunged against its US counterpart on Wednesday, as the Bank of Canada unexpectedly lowered its trend-setting interest rate to mitigate against the shocking collapse in oil prices.

The central bank lowered its target for the overnight rate by 25 basis points to 0.75 percent and cut its outlook on the Canadian economy. Economists had forecast no change to the benchmark lending rate but did expect a downwardly revised growth outlook.

The decision came in “response to the recent drop in oil prices, which will be negative for growth and underlying inflation in Canada,” read the official BOC rate statement.

Home to the world’s third-largest known oil reserves, Canada relies heavily on oil exports to feed economic growth. The collapse in oil prices could hamstring the domestic recovery in the short-run as producers trim investment plans and reduce staff in response to the current situation.

US crude was little changed on Wednesday, trading at $46.39 a barrel. Global benchmark Brent crude rebounded sharply, gaining 3.13 percent to $49.49 a barrel.

The BOC lowered its growth outlook for the year to 2.1 percent from 2.4 percent and said it expects the economy to rebound 2.4 percent in 2016. The impact of plunging oil prices will be felt in the first half of the year, resulting in annualized growth of just 1.5 percent – nearly a full percentage point below the previous forecast.

The BOC added, “Although there is considerable uncertainty around the outlook, the Bank is projecting real GDP growth will slow to about 1 1/2 per cent and the output gap to widen in the first half of 2015. The negative impact of lower oil prices will gradually be mitigated by a stronger U.S. economy, a weaker Canadian dollar, and the Bank’s monetary policy response.”

Weak oil prices are also weighing on inflation, giving the Bank of Canada plenty of scope to maintain ultra-low interest rates. Canadian inflation slowed to 2 percent in the 12 months through November, Statistics Canada reported last month. December CPI is forecast to fall to 1.5 percent year-on-year. According to the BOC, inflation will continue to trend lower in the short-term before gradually returning to the 2 percent target over the projection horizon.

The unexpected move added more pressure on the Canadian dollar, whose forecast has been tarnished in recent months amid a surging US dollar. The loonie, as the Canadian dollar is known, bottomed out at 0.8116 US on Wednesday. It would subsequently consolidate at 0.8141, declining 1.42 percent.

The USDCAD rose to a nearly six-year high, climbing more than 170 pips to 1.2286. The pair’s next resistance is located at 1.2354.

The US dollar was broadly supported on Wednesday after hitting a fresh 12-year high against a basket of its major competitors, including the loonie. The US dollar index surpassed the 93.00 level on Tuesday before consolidating at 92.88 on Wednesday.

In US data, single-family housing starts rose to a six-and-a-half year high in December, adding further evidence the housing market was regaining momentum. Housing starts rose 4.4 percent in December to a seasonally adjusted annual rate of 1.089 million, the Commerce Department reported today in Washington. Building permits for single family homes rose 4.5 percent, the biggest monthly increase since September 2012.

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