As we talked about in our recent “Central Bank FX Recap & Outlook” webinar this week, the Bank of Canada refrained from lifting rates for a fourth time this year and kept policy unchanged at its December meeting yesterday.
The key drivers behind the bank’s decision to maintain rates at 1.75% were the heavy sell-off in oil prices as well as lower domestic growth as a result of uncertainty linked to ongoing trade disputes.
The dramatic sell-off in oil over recent months has come as an unexpected obstacle for the bank which, at its last rate hike in October, was confident that further rate hikes would be necessary.
Indeed, the bank even moved away from saying that further rate hikes would be data dependent. However, the BOC struck a much more subdued tone this time around highlighting the severity of the decline in oil which has negatively impacted Canada’s export-based economy.
Looking ahead, however, there is plenty of scope for the BOC to resume its tightening program in Q1 2019. If oil prices can stabilize as a result of a global effort to curtail production and if negotiations between China and the US are seen to be progressive, we are likely to see a further rate hike in Q1 next year.
USDCAD has now broken above the 1.3370s level which had been the prior 2018 high and is trading at a level not seen since early 2017. Now above both bearish trend lines, there is open water between here and the 2017 high of 1.3786 which is the next major resistance.