USD/CAD flat lines near 1.3950, BoC rate decision in the spotlight
- USD/CAD trades flat around 1.3955 in Wednesday’s early Asian session.
- The BoC is expected to hold interest rates steady on Wednesday.
- Trump said the auto industry could get exemptions from tariffs.
The USD/CAD pair holds steady near 1.3955 during the early Asian session on Wednesday. The upside for the Canadian Dollar (CAD) might be limited amid the dovish expectations from the Bank of Canada (BoC). The BoC interest rate decision will take center stage later on Wednesday, with no change in rates expected.
Cooler-than-expected Canadian inflation data supported bets for additional interest rate cuts by the BoC this year, which might drag the CAD lower against the Greenback. Data released by Statistics Canada on Tuesday showed that the country’s Consumer Price Index (CPI) inflation eased to 2.3% in March from 2.6% in February. This figure came in softer than the estimation of 2.6%. On a monthly basis, the CPI rose 0.3% in March, compared to 1.1% prior and 0.7% expected.
Investors saw a 57% chance that the BoC would pause its interest rate-cutting cycle at its April meeting on Wednesday but expected the BoC to resume easing in June and were pricing in two additional reductions in total by the end of 2025, according to a Reuters poll. The BoC's benchmark interest rate is currently at 2.75%.
US President Donald Trump on Monday said he was considering a modification to the 25% tariffs imposed on foreign auto and auto parts imports from Mexico, Canada and other nations. Trump's move to exempt crucial technology products from reciprocal tariffs and reports of a potential pause in his auto import levies eased concerns of imminent recession risks in the US. This, in turn, could provide some support to the US Dollar (USD) in the near term.
Bank of Canada FAQs
The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.
In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.
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