The final Bank of Canada (BOC) decision for the year will be announced today. During 2020, the Canadian dollar (CAD) turned out to be one of the strongest currencies on the FX dashboard against the U.S. dollar (USD). At the time of this writing, the USDCAD exchange rate shows 1.28 after it was as high as 1.4660 in March.
Since March, many things have changed in the BOC’s monetary policy. The central bank delivered rate cuts and engaged in quantitative easing, but so did the Fed in the United States. As such, despite having the monetary policy loose, BOC could only watch the CAD getting stronger by the day. The USDCAD exchange rate fell so much that now it trades well below the level it had at the start of the year.
Once again, it shows that an exchange rate depends on the actions of both central banks involved, and not only one. The one that acts more decisive and powerful, will have a bigger impact on the exchange rates.
Bank of Canada at the Lower Boundary
The Bank of Canada started the year having the official policy interest rate set at 1.75%. In a response to the COVID-19 pandemic, the central bank cut the rate three times in March only, each time fifty basis points, until it reached the lower boundary at twenty-five basis points. On top of that, it expanded the balance sheet aggressively via quantitative easing.
Basically, the BOC did what every central bank in the developed world did – cut rates close to zero and engage in quantitative easing. The only difference between central banks is the size of the quantitative easing program related to the size of the economy.
Unlike other central banks, BOC also watches closely the changes in the price of oil. In fact, it is the price of oil falling to negative territory in 2020 that drove the CAD lower. Now that both the WTI and Brent crude oil prices are back close to $50, the CAD has yet another reason to strengthen.
Do not expect much from today’s BOC decision, even though it represents the major economic event of the day. As we head deeper into December, market participants focus on how to close the trading year and how to survive the two main events still ahead – the ECB and the Fed’s interest rate decisions.