Bank of Canada (BOC) delivered its monetary policy report and decision yesterday. It kept the interest rate unchanged to the 0.25% level, literally the effective lower boundary as recognized by the bank.
The Canadian dollar (CAD) dropped about a hundred pips yesterday, but the move lower cannot be attributed to the BOC’s interest rate decision. Instead, the price of oil is a major driver for the CAD lately and will remain so for as long as BOC keeps the overnight rate close to zero.
Price of Oil Driving the Action on the CAD Pairs
The price of oil had one of its best-ever rallies ever since it dropped into negative territory. Back in April this year, the futures contract for May had no buyers anymore. As most European economies were in lockdown mode and the United States economic activity began to follow the same path, demand for oil plunged.
Suddenly, producers faced the unusual circumstance of having too much oil on their hands and no more free storage. As such, the WTI price for the May delivery contract dropped below zero. Moreover, it settled that day at – $40.
Not many brokers show this level on the charts displayed to their clients today, but those courageous enough that bought oil that day and kept it all along probably made the trade of their lifetime. The price of oil did not stop until $43 (this time positive), triggering a massive rally on the CAD, viewed as a commodity currency.
The price of oil and the CAD always move in a tight correlation. This is particularly true when the central bank’s interest rate does not attract long-term investors, as it is the case these days.
Canada has an energy-intensive economy, and higher oil prices led to higher CAD. Therefore, yesterday after the BOC’s interest rate decision, the market merely reacted to a bounce in the oil price rather than at the much-anticipated BOC message.
However, the central bank’s governor Macklem delivers a speech today. Four hours after the ECB press conference starts, BOC’s Macklem talks about the pandemic effects on the economy. CAD traders should be on the watch for any hint of future changes in the monetary policy.
It is accustomed that central banks use events in-between two meetings to better communicate their intentions, as the market tends to be distracted and thus, there is not much volatility on the CAD currency pairs.