Bank of Canada No Smoking Gun for CAD Gains
- Written by: Gary Howes
Above: File image of BoC Governor Macklem. Image © Bank of Canada, Reproduced Under CC Licensing.
The Canadian dollar (CAD) was softer after the Bank of Canada erred on the side of caution in its latest update.
The Bank surprised no one by keeping the base interest rate unchanged, while downplaying recent above-consensus economic data prints.
"Policymakers have adopted a more balanced view of recent improvements in hard economic data," says Taylor Schleich, an economist at National Bank of Canada.
Money markets have lifted bets for an interest rate rise at the Bank in 2026, and this has conferred support to CAD over recent days.
We suspect the markets wanted to hear something from the Bank that verified those bets; namely, that a rate hike might be appropriate in 2026 in response to improving economic activity and robust core inflation dynamics.
"Bond yields fell when the statement was released as it downplayed upside surprises in recent data, and seemed to undermine the possibility of a rate hike in 2026, which markets had previously placed odds on," says Katherine Judge, an economist at CIBC.
This week saw the Reserve Bank of Australia (RBA) provide a hawkish template that the Bank of Canada might have followed: the RBA kept rates on hold and Governor Michelle Bullock introduced the idea of the next move being a hike.
AUD has risen sharply in response.
For CAD, a similar outcome was not forthcoming:
"The Bank of Canada held its policy rate unchanged but stopped short of validating market expectations for rate hikes as soon as the middle of next year," says Schleich.
"The policy statement leaned to the dovish side," says Jayati Bharadwaj, Head of FX Strategy at TD Bank.
Looking ahead, TD says the CAD will likely require chronic trade uncertainty to dissipate before it gets its skates on.
"We expect USDCAD to end the year at 1.38, and our quant macro framework (MRSI) points to a CAD where positioning is bearish vs. the USD and can see gains on a turn in USD sentiment. However, for CAD to continue to outperform peers on any USD selloff you would need some USMCA/trade uncertainty resolution which is harder to see in the imminent horizon," says Bharadwaj.
