The Canadian dollar slumped today, reaching parity with its US counterpart, after the Bank of Canada suggested that an interest rate cut is not necessary immediately and may be postponed.
The BoC left its main interest rate at 1 percent. The bank said that “the global economic outlook is slightly weaker” that was projected in October. The BoC noted Europe’s recession that is likely to drag on this year and slowdown of China’s growth. Regarding domestic fundamentals, the central bank mentioned that “the slowdown in the second half of 2012 was more pronounced than the Bank had anticipated”.
The most important part, that affected the currency, was the projection of the future monetary policy:
While some modest withdrawal of monetary policy stimulus will likely be required over time, consistent with achieving the 2 per cent inflation target, the more muted inflation outlook and the beginnings of a more constructive evolution of imbalances in the household sector suggest that the timing of any such withdrawal is less imminent than previously anticipated.
Previously, Canada’s central bank was constantly making noise about reducing accommodative measures, hinting at higher interest rates. Now, an interest rate hike looks less probable.
USD/CAD jumped from 0.9915 to 0.9989 as of 18:51 GMT today, reaching 1.0002 intraday — the strongest rate since November 19. EUR/CAD climbed from 1.3210 to 1.3294 — the highest settlement since March 30. CAD/JPY dropped from 89.40 to 88.64, falling for the fourth straight session.
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