The Canadian Market‐determined Bank Rate and the Bilateral Canada/US Spot Exchange Rate

Innovations – the unanticipated component – of the Canadian market‐determined bank rate announcements have an immediate impact on the bilateral Canadian/US dollar spot exchange rate, with the sign of the impact depending on market perceptions of the monetary policy regime in which the central bank is operating. The expected bank rate changes do not have a significant impact on the spot rate. Moreover, a test of the “news” impact on the Canadian/US dollar must include the relationship between the latter and Deutschmark/ US$ spot rate, which is a proxy for the movement of the US dollar against major offshore currencies.