Currency analysts watch for interest rate decision

(Country Guide file photo)

CNS Canada — The likelihood of the Bank of Canada cutting interest rates on Wednesday is already priced into the loonie, according to one analyst — but if the bank instead decides to hold rates steady, the beleaguered currency could move higher.

The Canadian dollar was trading around US69 cents (US$1=C$1.45) near midday Tuesday, which is close to undervalued, said Mark Chandler, head of Canadian fixed income and currency research at RBC Dominion Securities.

“Obviously the Bank of Canada’s decision tomorrow has been on everyone’s radar,” he said.

At about 9 a.m. CT, the Bank of Canada’s governor Stephen Poloz will announce the bank’s decision on interest rates; it’s expected to either keep interest rates steady at 0.5 per cent, or lower them.

If the bank cuts interest rates, which market watchers say is a possibility, it will pressure the loonie, but not dramatically.

“I think it’s mostly priced into the Canadian dollar. There’s still probably some room for some modest weakness,” Chandler said.

The market has priced in about a 50 per cent likelihood that a cut will happen, he said.

Although the cut has been factored in, Chandler said RBC’s official stance is that there will be no cut — “and if they don’t cut then there could be a bit of a bounce.”

Outside of the Bank of Canada’s influence, the Canadian dollar’s movement is dependent on oil prices.

At current levels people are worried about oil continuing to slide, Chandler said, but the assumption in forward markets is that prices will drift higher from current levels as the year goes on.

“That might help to stem the decline in the currency.”

Jade Markus writes for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting. Follow her at @jade_markus on Twitter.

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