Image © Bank of Canada. Source: Bank of Canada on Flickr.
The Canadian Dollar rose sharply against the Pound midweek, taking GBP/CAD to a key support level.
A steady hand on the tiller at the Bank of Canada (BoC) and a strengthening Dollar are helping the Canadian Dollar extend gains against its peers, with the biggest coming against European currencies such as the Euro and Pound Sterling.
The Bank left interest rates at 2.75% and its guidance confirmed the odds of further cuts were limited. This had the effect of bolstering domestic short-term bond yields and the currency.
"There was a clear consensus to hold, and proceed carefully," says a response note from domestic bank CIBC following the decision. Market pricing shows the Bank should start raising interest rates again in 2026, and CIBC says this "supports" CAD moving higher.
The Canadian Dollar was unable to resist the broader U.S. Dollar onslaught, leaving the USD/CAD facing a sixth consecutive daily decline as it tests 1.3850 at the time of writing Thursday.
Despite this, the Canadian Dollar is resisting the U.S. Dollar's advance better than most, meaning it is following its Southern neighbour higher against its G10 peers.
This North American bloc is in control at present, pushing the Euro to Canadian Dollar exchange rate back to support at 1.5836, having been as high as 1.61 as recently as Monday.
The Pound to Canadian Dollar conversion (GBP/CAD) is also on the ropes, now having to defend support at 1.83, a level we have long been watching.
Presented below is our Week Ahead Forecast made two weeks ago, which we opted to keep in situ this Monday. It shows our calls for a shallow mid-month rebound followed by a fall to 1.83 to have been spot on.
Above: GBP/CAD at daily intervals with Week Ahead Forecast annotations.
Technical momentum is increasingly in favour of the Canadian Dollar but now that GBP/CAD has been knocked back to 1.83 we are more inclined to sit and watch ensuing developments. Does 1.83 hold and provide scope for a bounce, or does it break and accelerate declines?
Domestically, the interest rate outlook will increasingly matter as market attention shifts from trade wars to relative interest rate dynamics.
A bullish CAD scenario would involve a prolonged pause at the BoC, while it would come under pressure again were the central bank to crack on with further rate cuts.
"Further rate cuts would be appropriate if it became clear that the economy was sliding into recession. Barring such deterioration and following our base case, we expect the BoC will maintain current rates going forward," says Claire Fan, Senior Economist at Royal Bank of Canada.
Above: USD/CAD (lower panel) effectively mirrors the USD/EUR.
However, economists at Wells Fargo think there are more cuts to come, which if correct, could upset current market thinking that the cycle is more or less complete.
"Unless trade tensions escalate noticeably further, the Bank of Canada expects headline inflation to remain well contained, even if core inflation remains elevated for the time being. This is one reason, in our view, why the central bank maintains an overall bias to ease," says Nick Bennenbroek, International Economist at Wells Fargo.
Wells Fargo thinks the Canadian economy will experience slower growth and a deceleration in core inflation over time, leaving economists to expect a further 50 basis points of rate cuts.
If such an eventuality were to materialise, a market realignment would constrain the CAD's advance, potentially even reversing it.
The BoC said on Wednesday that it saw the potential "need for a reduction in the policy interest rate" if there's further net downward pressure on inflation stemming from a weakening economy.