Loonies Surges As Bank Of Canada Holds Rate At 1.00%

By Trang Nguyen,

THETAKEAWAY: Central Bank Holds KeyRate at 1 percent > TheOutlook for Canadian Economy Has Improved and InflationExpectations Has Been Well-Anchored > CanadianDollar Gains

At the monetary policy meeting today, the Bank of Canada announced its decision to hold the key interest rate at 1.00 percent for the twelfth time in a row, extending its longest pause since the 1950s. The target rate has left unchanged since September 2010, after seeing three consecutive 25 basis points increases from 0.25 percent. Bank of Canada’s rate decision came in with no surprise as it matched with twenty-eight economists’ projections from Bloomberg survey. The Bank Rate is correspondingly 1.25 percent and the deposit rate is 0.75 percent.

The Bankcited “marginally improved outlook for Canadianeconomy” and “well-anchored inflationexpectations” as the main reasons to keep the key rate onhold. Since the Bank released its JanuaryMonetary Policy Report (MPR) , theglobal economic outlook has improved and uncertainty has reduced asEuropean bank funding and sovereign debt markets showed signs ofstabilization. Given enhanced global economic conditions, risingcommodity prices and strong private demand, the Bank seesfaster-than-expected growth in the first quarter. In January, thebank had predicted growth averaging 1.8 percent for the first halfof this year. Besides, Canadian inflation is somewhat “firmerthan previously anticipated” due to reduced economic slackand higher oil prices. Core inflation is expected to be around 2percent over the forecast horizon.

The Bank also said in its statement that “persistent currency strength” of the Canadian dollar has been an ongoing challenge for the world’s tenth largest economy as this would dampen foreign demand and negatively affect net exports. “With the target interest rate near historic lows and financial system functioning well, there is considerable monetary policy stimulus in Canada”. Regardless, policy makers continued to endorse wait-and-see approach while noting that recent fundamental evidences point to better outlook than projected a couple of months ago.

USD/CAD 1-minute Chart: March 8, 2012

Charts createdusing Strategy Trader – Prepared byTrang Nguyen

In theminutes following the Bank of Canada rate decision, the Canadiancurrency immediately gained ground versus its major currencies. Ascan be seen from the 1-minute chart above, the USDCAD pair droppedapproximately 50 pips from 0.9955 to 0.9915 within ten minutes.The Relative Strength Indicator crossingbelow the 30-level, an oversold territory, signaled that currencytraders were aggressively selling the greenback in favor of theloonie. Obviously, improved prospect for Canadian economy indicatesinterest rates could hike again sooner rather than expected earlierthat would attract more foreign investors looking for high-yieldreturns on their investments. At the time this report was written,the Canadian dollar was traded at $0.99275

--- Written by Trang Nguyen, DailyFX Research Team for DailyFX.com

Tocontact Trang, email tnguyen@dailyfx.com
DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/market_alert/2012/03/08/030812_Canadian_central_bank_rate_decision.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

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