Canadian dollar falls after the Bank of Canada decision. What's next

<p>USD/CAD is on track to close above 1.3500 for the first time this year after climbing nearly a full cent in the aftermath of today's Bank of Canada rate decision.</p><p>The consensus belief on the move higher in the pair today (i.e. the decline in CAD) is that it was because the Bank of Canada took out an explicit mention of further possible hikes. That doesn't add up to me. No one was expecting any more Bank of Canada hikes and the overall message from the BOC wasn't dovish. </p><p>Yes, there was an incremental move towards easing but that was entirely expected. I'd argue that the statement and press conference showed that Macklem is behind the curve. The economy in Canada is slowing rapidly and 5.00% rates are a painful burden on an over-indebted economy that's already on the way to the inflation target.</p><p>By focusing on wages and core inflation, Macklem almost ensures he will be behind the curve because those are lagging indicators.</p><p>The result will be an economy that significantly underperforms this year, and that's against the BOC forecast which is just for 0.8% GDP growth. I expect a recession will become more clear in Q1 and unless the BOC quickly changes gears, they will be forced to cut more later than if they started slowly cutting now.</p><p>The market has moved past inflation and it's abundantly clear it won't be a problem. By dragging on the fight, the Bank of Canada is fighting yesterday's battle and will be a step behind in the battle to shore up growth.</p><p>Expect the Canadian dollar to continue to struggle as it becomes increasingly clear that the BOC will need to cut much more deeply than the Fed. The risks are particularly stark if the spring housing market is a dud and prices fall further. We should start to get an idea of how that will go in early March.</p><p>On the upside, the latest China stimulus and the possibility of Fed cuts are both potential positives for the loonie as the boost global growth. I think that will temper any downside in the loonie (or even provide some upside) until it becomes clear that Canada's economy is uniquely soft.</p><p>Ultimately, I think the path for USD/CAD is higher but it will be a slow and meandering path to get there.</p>

This article was written by Adam Button at www.forexlive.com.