USD/CAD reaches two-week high at 1.2762, on dovish BoC

• Bank of Canada held its interest rates unchanged at 0.25%.
• BoC decided to maintain its QE program at C$ 2 billion per week.
• The bank expects to absorb economic slack and achieve the 2% inflation target by mid-2022.

USD/CAD is rallying during the American session. The pair is trading at 1.2735, up some 0.72% on the day at the time of writing.

The main driver of the price action is the Bank of Canada’s monetary policy decision. The central bank decided to keep its overnight rate unchanged at 0.25%. The quantitative easing (QE) program is maintained at C$ 2 billion per week.

The central bank mentioned that global economic recovery continued through Q2, mainly driven by strong US growth and carries solid momentum into the Q3. However, supply chain disruptions restrain activity in some sectors, and COVID-19 outbreaks in some regions threaten to slow global recovery.

Nevertheless, on September 1, the Canadian GDP showed that the economy shrank by 1.1% in Q2, on a year-over-year basis. The contraction was attributed to exports. The sector that performed the worst was the housing market, as previously expected. Consumption, business investment and government spending contributed positively to growth, with domestic demand growing at more than 3%.

Employment conditions improved through June and July but, considerable slack remains, with low-wage workers being extremely affected. The BoC expects the economy to strengthen in the second half of 2021, but supply bottlenecks and the fourth wave of COVID-19 could weigh on the economic recovery.

CPI inflation remains above 3% as expected, boosted by energy and pandemic-related supply bottlenecks. The BoC expects the rise in prices to be transitory, but it will be firmly monitored.

The BoC reiterated that the recovery still needs monetary support. The central bank is expected to hold its interest rates at the current levels until the QE program ends and the 2% inflation target is achieved. Under the BoC’s projections, this will happen in the second half of 2022