The Canadian dollar exchange rate complex (CAD) has been hammered by an unexpected rate cut at the Bank of Canada.

As we noted in our most recent forecast update, there was very little chance of a cut priced in by currency markets.

Not one of the 22 economists surveyed by Bloomberg were expecting a cut, and the market’s massive reaction confirms traders’ surprise.

Many had though the lower exchange rate would have done much of the heavy lifting required to soften the economic impact of softer oil prices and a rate cut was therefore not needed.

The move follows the shock-and-awe move by the Swiss National Bank to stop defending the currency floor against the euro. Which central bank will shock us next?

A look at the markets in the aftermath of the move shows just how unprepared traders were:

The pound to Canadian dollar exchange rate (GBP/CAD) is 2.0% higher on a day-by-day comparison at 1.8700. Levels not seen since 2009.The euro to Canadian dollar exchange rate (EUR/CAD) was a whopping 2.4% higher at 1.4330.The US dollar to Canadian dollar exchange rate (USD/CAD) is 2.08 pct higher at 1.2365.Note, if you are looking to transact on CAD the above rates are subject to a discretionary spread. By using an independent provider you could gain up to 5% more currency - find out how.

Above: The GBP/CAD surges to inter-year highs.

The Bank of Canada: What Happened

The BoC has cut the basic interest rate from 1 pct to 0.75 pct.

“The drop in oil prices is unambiguously negative for the Canadian economy. Canada’s income from oil exports will be reduced, and investment and employment in the energy sector are already being cut,” read a statement on the move by Bank of Canada Governor Stephen Poloz.

The negative impact of lower oil prices will gradually be mitigated by a stronger U.S. economy, a weaker Canadian dollar, and now the lower rates of interest on credit.

The Traders Response and Changes to Forecasts

“CAD shocked lower by a surprise Bank of Canada cut that pushed Canada's 2-year rates over 30 basis points lower. This argues for not only 1.25, but possibly the post-global financial crisis high of 1.30.” - John Hardy at Saxo Group.

Shaun Osborne at TD Securities: “Despite the strong gains in the USD, there is little sense from the broader studies that the rally is over-extended. Choppy and gappy price moves may requires some back and filling of today’s aggressive pop, however, but that should mean little or no lower than 1.2145/50 near-term before the underlying trend higher resumes.”

"The Bank of Canada’s rate cut shocker has added further momentum to the USDCAD rally. The contrast between an easing BoC and the Fed moving towards policy normalization highlights the potential for further gains in USDCAD in the medium term.

"We think USDCAD is heading towards 1.30 in the next few months from a technical point of view."

Matt Weller at Forex.com: “Have you ever been punched in the gut when you weren’t looking? I hope not, but if you were a loonie bull this morning, now you know what it feels like.“