Canadian dollar plunges to new 6-year low after surprise BoC rate cut

The Canadian dollar slumped to a new six-year low against the greenback on 15 July as the Bank of Canada surprised markets with a rate cut citing downside risks to growth and inflation.

The BoC slashed the main lending rate in Canada to 0.5% from 0.75%. It was a cut of same size in January that had taken the rate there.

It now projects Canada's real GDP will grow by just over 1% in 2015 and about 2.5% in 2016 and 2017, the BoC statement said.

It added: "With this revised growth profile, the output gap is significantly larger than was expected in April, and closes somewhat later. The bank anticipates that the economy will return to full capacity and inflation to 2% on a sustained basis in the first half of 2017."

USD/CAD jumped around 200 pips to 1.2924 after the rate announcement, making a 1.5% decline in the loonie.

The move on 15 July pushed the Canadian dollar through the mid-March support of 1.2836 to hit its lowest since March 2009.

The pair had hit a high of 1.3066 six years ago and a break of that will take the Canadian currency to its lowest in 11 years against the greenback.

"The lower outlook for Canadian growth has increased the downside risks to inflation," the BoC statement showed.

"Additional monetary stimulus is required at this time to help return the economy to full capacity and inflation sustainably to target."

Some analysts had been expecting a cut at the 15 July review given the renewed downside pressure on crude prices and sluggish growth numbers from the US.

In an email circulated earlier in the day, Peter Rosenstreich, head of market strategy at Swissquote, said: "We anticipate that the Bank of Canada will cut interest rates 25bp today with accompanied dovish language. The key factor is the evolving story of long term oil weakness [continued supply overabundance] which will provide direct headwinds to Canadian growth outlook."