Research Team at ING, notes that the Bank of Canada has kept rates unchanged at 0.5% as widely expected and the statement remained broadly unchanged from the last meeting. Key Quotes “Indeed, the statement reiterates that “the risks to the profile for inflation are roughly balanced”, reflecting the fact that core inflation continues to remain around the 2% level. However, inflation is not the key concern for the Bank of Canada, who have for a long time now placed greater emphasis on encouraging growth in non-resource sectors. Although non-energy exports have picked up, the BoC themselves acknowledged in their last Monetary Policy Report that these sectors have been boosted by the weaker CAD. Thus, given that the CAD had strengthened around 9% since January’s meeting, we are slightly surprised that we didn’t see a more pronounced dovish shift. Incidentally, we suspect that this is the BoC’s lower bound for CAD strength. In reality, the BoC may have wanted to wait until the Federal Budget is announced on 22nd March. Indeed, there is a reference to this in the statement which states that the effect of any fiscal measures will be incorporated into the April projections. Going forward, the risks to Canadian growth are unlikely to completely disappear in the near-term. The longer oil prices remain relatively low, the higher probability there is that the damage to the energy sector spreads through to the wider economy. As such, we still think that the BoC may ultimately adopt a more dovish bias and the risk of a rate cut later this year is still there. FX Commentary: The BoC also stated that recent CAD strength has been a result of the rebound in oil prices and narrowing Fed-BoC policy expectations. Our short-term USD/CAD financial model corroborates this story, with our estimates showing that the pair should currently be trading in the 1.3450-1.3500 area. Yet, we remain cautious over chasing any further USD/CAD downside for two reasons. First, BoC rate cut expectations are being underestimated and we think there is a strong chance that the central bank cuts rates again in April when the new projections are released. Second, commodity FX outperformance is usually the initial reaction to a positive shift in the risk environment; we would expect this to give way to a hawkish Fed repricing should risk-on sentiment persist. Hence, the relative Fed-BoC policy expectations channel is likely to work against the loonie over the coming months and with the outlook for oil prices still uncertain, we prefer to remain long USD/CAD and retain our 1M forecast of 1.40.” For more information, read our latest forex news.