Forex Investment and Currency Trading

The market had been expecting a 25 basis point cut in the overnight rate by the Bank of Canada this morning but the BoC left rates on hold at 3%, shocking the market.

The market plummeted from 1.03 to 1.02 as everyone scrambled to digest the news.  The major reason behind the decision was rising inflationary pressures driven by high energy and commodity prices.  There is still some potential for weaker growth going forward, but credit conditions have been in line with expectations and current monetary policy is viewed as “appropriately accommodative”.

What does this mean going forward?  With oil around $135/barrel and the Bank of Canada keeping the overnight rate on hold, this puts some strength back into the Canadian dollar.  Conversely the US dollar has been doing very well lately as Bernanke has been in the market talking up the US dollar, citing risks of an economic downturn diminishing despite high oil and gas prices and the need to take a weak US dollar into account when determining monetary policy.

The US still has some skeletons in the closet and this could turn sentiment in favour of the Canadian dollar, preventing us from testing the upper end of our 7 month trading range (1.0343).  Although market is now looking for some Canadian dollar strength versus the US dollar we don’t view this to be the catalyst to break us through the lower end of our 7 month trading range (0.9724) as growth in Canada is starting to slow down.