TORONTO: The Canadian dollar rallied against its US counterpart on Tuesday as markets scaled back expectations of another interest rate cut in March following comments from the Bank of Canada.
BoC Governor Stephen Poloz said in a speech on Tuesday that last month's surprise rate cut bought the central bank time to see how the economy responds to the recent plunge in crude oil prices.
"We had speeches leading up to this one that sounded quite dovish and would've suggested that a cut at the March meeting was on the table and the market had positioned itself accordingly," said Mazen Issa, senior Canada macro strategist at TD Securities.
Poloz's speech also indicated the bank may be taking a wait-and-see approach, Issa said, which provided a significance bounce to the Canadian dollar.
"The conviction level of another cut is certainly much lower than prior to the speech," he said. "To appreciate how significant this speech was, going into it, the market was really treating it with the same degree of reverence as an interest rate meeting."
The Canadian central bank blindsided markets in January with a 0.25 percentage point rate cut. The market is now pricing in about a 70 percent chance of another cut next week, a lower probability than prior to the comments.
The Canadian dollar, which was outperforming most of its key counterparts, finished at C$1.2496 to the US dollar, or 80.03 US cents. This was sharply higher than the session's weakest trade at C$1.2662, or 78.98 US cents and Monday's close of C$1.2576, or 79.52 US cents.
Federal Reserve Chair Janet Yellen earlier on Tuesday said in testimony to a congressional committee that the US central bank would consider interest rate hikes "on a meeting-by-meeting basis" in an effort to increase the Fed's flexibility and mute any potential market reaction ahead of move.
The loonie has been under pressure as slumping oil prices weigh on the country's crude-exporting economy, and the monetary policies of Canada and its largest trading partner diverge.
"Assuming we don't see a significant deviation in oil prices, then I would think dips in USD/CAD today will be worth buying into," said Jeremy Stretch, head of foreign exchange strategy at CIBC World Markets.
Canadian government bond prices were mixed across the maturity curve with long-term bonds higher. The two-year fell 16.5 Canadian cents to yield 0.471 percent and the benchmark 10-year rose 39 Canadian cents to yield 1.318 percent.
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