A 0.50% interest rate cut would trigger initial selling on the Canadian dollar and sentiment remains weak, but the US currency looks to offer poor value above 1.2050 against the Canadian currency.   

The Canadian dollar was unable to hold stronger than the 1.18 level against the US dollar on Monday and there was a renewed decline to 1.1980 in late US trading as the US currency rallied.

The principal short-term focus will be on the Bank of Canada interest rate decision. Markets are expecting a further 0.50% to 2.00% which would tend to keep the currency on the defensive, although the bank may want to be more cautious, especially as there was a 0.50% rate cut earlier this month.

A reduction of less than 0.50% would provide immediate relief for the currency. The Canadian dollar will still be hampered by the underlying deterioration in global growth conditions, especially if there is a further decline in commodity prices.