C$ firms as rate-cut expectations scaled back

TORONTO: The Canadian dollar strengthened sharply against its US counterpart on Wednesday after the Bank of Canada kept interest rates steady and signaled it was satisfied with how the market and the economy reacted to its surprise rate cut in January.

The bank kept its benchmark overnight interest rate at 0.75 percent and said that inflation risks were more balanced following its unexpected 25 basis point rate cut in January.

Before the bank's statement on Wednesday, the market had priced in about a 60 percent chance of a rate cut in April. After the bank's comments about the economy, those expectations were scaled back to about 20 percent.

"The market really seems to be saying now that it may well be 'one and done'," said Don Mikolich, executive director, foreign exchange sales at CIBC world markets.

"I don't know that we're going to have extensive CAD gains beyond here. We still have the Fed likely to hike, we still have oil prices ... A lot of the conditions that are out there are not overly CAD supportive. You've maybe removed one element."

The Canadian dollar ended the North American session at C$1.2416 to the greenback, or 80.54 US cents, stronger than Tuesday's finish of C$1.2490, or 80.06 US cents.

Canada is a major oil producer and currency strategists are still calling for a weaker Canadian dollar, linked to low oil prices, in coming months, according to a Reuters poll released before the bank's statement.

The bank said in January it expects economic growth of 1.5 percent in the first half of 2015 and did not change that forecast on Wednesday.

"For them to cut (rates) any further you'd have to see growth showing downside surprise relative to 1.5 percent growth," said Craig Wright, chief economist at Royal Bank of Canada.

"We think growth will be a bit better than that. If our growth forecast is correct, then they won't need to go any further."

Canadian government bond prices were lower across the maturity curve. The two-year fell 21 Canadian cents to yield 0.608 percent and the benchmark 10-year fell 82 Canadian cents to yield 1.507 percent.