Above: File image of Tiff Macklem with Finance Minister and Deputy Prime Minister Chrystia Freeland. Image source: Bank of Canada.

The Canadian Dollar extended its daily losses against the Pound, U.S. Dollar and other major currencies as the Bank of Canada tilted in a 'dovish' direction in their January policy update.

The statement dropped the earlier reference to a potential need to hike if inflation failed to cool, turning the discussion to how long rates will be required to remain at current levels.

"The Governor noted that the meeting has shifted from a discussion of whether rates are high enough to one about how long they need to keep rates at 5%," says Avery Shenfeld, an economist at CIBC Bank.

"That’s a dovish tilt," he explains.

The outcome will disappoint some market participants who were looking for a 'hawkish' pushback from the Bank.

The Canadian Dollar was already weak heading into the BoC decision, weighed by the selloff in the U.S. Dollar. As we have noted before, the two North American currencies tend to move in unison.

The 'dovish' undertones from the Bank of Canada will add to the weakness.

"The Canadian dollar has weakened following the BoC the announcement," says Francesco Pesole, a foreign exchange strategist at ING Bank. "We still see CAD as less attractive than other pro-cyclical currencies like NOK and AUD this year - also due to our expectations for large rate cuts in Canada."

Above: "CPI infl ation is forecast to return to target in 2025" - Bank of Canada Monetary Policy Report.

ING expects the first BoC rate cut to fall in the second quarter of 2024, potentially making this one of the first major central banks to cut.

New economic projections show the Bank expects Canada to endure poor growth in the first half of the year, but the second half will likely see growth improve.

"The pick-up in growth projected for the back half of the year might well be tied to their own expectations for lower rates at that time," says Shenfield.

CIBC expects the first Bank of Canada rate cut in June, with as much as 150 bps of cuts on tap this year if the economy is to start moving again after its current stall.

The Pound to Canadian Dollar is witnessing one of its strongest days of the year, advancing 0.64% to its highest level since November at 1.7183.

The Dollar to Canadian Dollar is relatively flat at 1.3470, and the Euro to Canadian Dollar is higher by 0.64% at 1.4697.