Bank of Canada's Decision Boosts Canadian Dollar

On Tuesday, the Canadian dollar rallied against the US dollar. The primary driving catalyst may have been the decision by the Bank of Canada. BoC policy makers opted to leave the Canadian interest rate unchanged at 1%. Following the decision, the Canadian dollar rallied up against the US dollar by over 0.3%. This is made even more notable by the fact that the US dollar index—a broad based measure of US dollar strength—also rallied on Tuesday, gaining over 0.10%. Thus, the Canadian dollar looked even stronger against other currencies, such as the euro, against which it gained nearly 0.5%. Against the Japanese yen, the Canadian dollar gained 0.40%. Canadian policy makers may have opted to leave rates on unchanged for a variety of reasons. Recent employment data came in worse than expected in Canada—although the situation was not overly grim. Canadian unemployment sits at a lesser rate than unemployment in the US, although the unemployment rate in the US has pulled back in recent weeks. In comments after the rate decision, policy makers noted that Canada continues to face some challenges, although economic growth in the US has been more robust than was expected. As Canada is a major trading partner with the US, and exports a tremendous amount of its natural resources to its southern neighbor, economic conditions in the US may have a major effect on Canadian monetary policy. For that reason, Canada may be in for some

in the future. If economic conditions in Europe continue to deteriorate, deflation could reappear in commodity prices. That could be tremendously negative for Canada's economy, as it gets less value for its commodity exports. In that situation, the Canadian dollar could reverse course and trade lower, as investors flee to the perceived safety of the US dollar. Of course, if Canada's economy continues to recover, the Canadian dollar might only strengthen from here. If the Canadian economy is improving, BoC policy makers may have no reason lower interest rates, and could even hike them. At a time when rates in the rest of the developed world remain low, the Canadian dollar could use relatively higher rates as a catalyst to rally. With global economic conditions remaining uncertain, it may be difficult to chart the course of the Canadian dollar going forward.