BOC on Rate Hikes: Don’t Hold Your Breath

The Bank of Canada (BOC) has stood out among central banks for the past year as one of the few that have been considering monetary policy tightening. While most central banks have been injecting their economies with round after round of stimulus, Canada has actually been thinking about withdrawing stimulus by increasing interest rates.

Since April of 2012, the BOC has hinted of plans of doing so. But for the second rate decision in a row, BOC Governor Mark Carney showed signs that the BOC isn’t in a hurry to hike rates.

Yesterday, the BOC kept its overnight rates at 1.00% for the 20th straight month, citing excess capacity in the economy that’s keeping inflationary pressures muted. The central bank didn’t specifically talk about its economic growth, but I think that weak housing starts, employment growth, retail sales, and even GDP reports might have contributed to the BOC’s decision.

What bothered the market players was that Carney’s language hinted that the BOC is exchanging its hawkish stance for a more neutral (even dovish) one. In his words, the BOC’s accommodative monetary policy “will likely remain appropriate for a period of time.”

Although the central bank maintains that a “modest withdrawal” will probably be needed in time and that its next move will likely be a rate hike, a growing number of people are starting to believe that the BOC will eventually change its mind about increasing rates.

In fact, investors are putting their money on it! According to stats from the CFTC, bets against the Canadian dollar are at record levels. Some analysts think that it’s highly unlikely we’ll see a rate hike this year. Others believe that the BOC will eventually drop its calls for higher interest rates altogether.

USD/CAD reaction

Not surprisingly, the Canadian dollar was dumped heavily after the BOC made its dovish announcement. USD/CAD shot upwards and stalled just a handful of pips below its 8-month highs.

USD/CAD 15-minute Chart

With the pair rising almost 700 pips over the past 6 months, I can’t help but wonder if Canadian dollar bears have enough fuel in their engines to keep the rally going. There are many out there (including the BOC) who think that the economy should pick up as the year progresses. If Canada can string together another series of positive reports, it could lead USD/CAD back down to sub-parity levels not seen since late last year.