The Bank of Canada held rates at 5.0% as had been widely expected, but did not deliver a dovish tilt, as had been hoped for.
Instead, Bank of Canada governor Tiff Macklem, in the press conference following the announcement, stressed that core inflation measures remained too high, and that there was no calendar on rate cuts yet.
Money markets now see less than a 25% change of a BoC rate cut in April, down from over 40% before the announcement. Bets are now for rate cuts in July, rather than in June as had been expected prior to the BoC rate statement.
ING FX Strategist Francesco Pesole notes that “The Canadian dollar reacted positively to the BoC announcement, as the unchanged policy statement defied some expectations that hints on rate cuts would be provided.”
Looking ahead for the pair in the medium term, Pesole notes that “The persistence of CAD’s correlation to US data and the strict link between Fed and BoC policy expectations means the room for a major break in either direction in USD/CAD does not seem very likely.”
ING expects the pair to keep trading in a 1.34/1.36 range until a clearer USD downtrend is likely to emerge in the second quarter, taking the pair towards 1.30 in the second half of 2025 – in line with a consensus forecast of analysts polled by Reuters.
In the March 1-6 Reuters poll of 40 foreign exchange analysts, the median forecast was for the loonie to strengthen to 1.34 per U.S. dollar, in three months and to 1.30 in a year as the USD faces a broad-based decline and the Fed shifts to rate cuts.
“The gradual decline in USD-CAD certainly in part reflects a slowing U.S. economy and the Fed embarking on a rate cutting cycle,” noted Derek Halpenny, head of research, global markets EMEA and international securities at MUFG.
“We also assume no hard landing (for the economy) and if risk remains broadly favourable this year that should also benefit CAD.”
Up next for the pair, the focus will be on Canada’s employment data on Friday, and U.S. Nonfarm Payrolls.
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