Further tapering of the bond-buying program in Canada failed to support the Canadian dollar. Bank of Canada sees further economic strength, thus tightening the financial conditions.
The Bank of Canada announced its monetary policy decision yesterday. It adjusted the size of its quantitative easing program to a target pace of $2 billion per week on the back of the stronger economic outlook.
As usual, the Bank of Canada delivered a comprehensive monetary policy report, covering aspects of the global and local economy. Growth is seen picking up not only in Canada but also in the developed world.
The bank forecasts 6.9% growth for the global GDP in 2021, followed by 4.4% in 2022 and 3.2% in 2023. The Canadian economy is also seen to grow strongly in the third quarter of this year. Real GDP is projected at 4.9% in 2021, 4.2% in 2022, and 2.9% in 2023.
Canadian Dollar Falls on Tapering Announcement
The Canadian dollar is one of the currencies that outperformed during the COVID-19 pandemic. As oil prices recovered from their lows and marched back above $70, it helped the Canadian dollar as the two are directly correlated.
Most of the time, developments in the oil market have a bigger impact on the Canadian dollar, and during the pandemic, it was no different. Therefore one may say that the Bank of Canada’s decisions are secondary in importance for currency traders.
The monetary policy report does move the market on its own, however. Yesterday’s announcement led to a sudden drop in the Canadian dollar as the USD/CAD pair bounced over one hundred pips from its daily lows.
While the Bank of Canada’s decision from yesterday should support the currency’s strength, the market reacted differently, with the dollar weakening on the news. The reverse of easy monetary conditions may also bring a reversal of the USD/CAD strength seen during the pandemic.