The Canadian dollar CADUSD strengthened against its U.S. counterpart on Wednesday as the Bank of Canada cut interest rates by half a percentage point, as expected, but shifted to more hawkish guidance on prospects for additional easing.
The loonie was trading 0.2 per cent higher at 1.4145 to the U.S. dollar, or 70.70 U.S. cents, after trading in a range of 1.4121 to 1.4193. On Tuesday, it touched a 4-1/2-year low at 1.4194.
“The decision to cut by 50 bps (basis points) has largely been overshadowed by a hawkish shift in guidance from the BoC,” said Nick Rees, senior FX market analyst at Monex Europe Ltd.
The Canadian central bank slashed its key policy rate by 50 basis points to 3.25 per cent and indicated further cuts would be more gradual, in a shift from previous messaging that continuous easing was needed to support growth.
BoC Governor Tiff Macklem also said for the first time that the possibility U.S. President-elect Donald Trump’s incoming administration might impose tariffs on Canadian exports represented “a major new uncertainty.”
“We are inclined to think that tariffs will warrant substantial further policy easing in 2025, regardless of the bank’s latest statements, which should ensure that this current bout of CAD strength is short-lived,” Rees said.
Money markets see a roughly 60 per cent chance the BoC will cut its policy rate by 25 basis points in January, with the market pricing in a 40 per cent chance of a pause in cuts.
The price of oil, one of Canada’s major exports, was up 1.2 per cent at $69.39 a barrel, its third straight day of gains.
Canadian government bond yields moved higher across the curve. The 10-year was up 5.5 basis points at 3.074 per cent, extending its rebound from a two-month low on Friday at 2.970 per cent.