As widely expect BOC kept their target rate at 1.0% where it has been since Sep 2010.
USD/CAD gained about 9% for September 2013 to the end of January 2014, but has since then ranged in the 1.11 area. The rally was due to expectations of BOC dropping their hawkish stance (which they did in their October statement) and then on expectations of them adopting a dovish stance and even cutting rates in 2014. The major driver of these expectations was low and falling inflation. However, with inflation stabilizing and even increasing there are less support for a dovish stance and even less for rates being cut in 2014. OIS implied probability for a rate cut has consequently fallen significantly in February, e.g. for the July meeting the implied probability for a cut was 36% in January but is now down at 17%. GDP Q4, released last Friday, surprised on the upside at 2.9% (expected 2.6%) which also point toward an economy that is strengthening.
The statement released with the rate decisions also makes these observations regarding inflation and growth: BOC states that recent inflation readings have been slightly higher and economic growth in Q4 was slightly stronger than anticipated. The statement thus indicates that BOC is far from cutting rates and that they will stay with a neutral stance for now.
Therefore, we believe that the USD/CAD rally is done for now. For new attempts higher inflation data need to surprise on the downside again. However, we still expect USD/CAD to rise during the year but in a much more modest pace and more due to general USD strength than CAD weakness as monetary policy becomes a positive factor for the USD.
SEB