*Bank of Canada, While Upping Growth Forecasts, Highlights Headwinds
to Economy*
The Bank of Canada held rates steady today at 1% and while it did
increase its growth outlook for 2011 and 2012, it seems that the
bank's Governor Mark Carney, continued to try and beat back the
strength of the CAD. He did this today by saying that any future
interest-rate increases would be "carefully considered." The BOC
statement also pointed to possible headwinds for the Canadian economy
including the strong Canadian Dollar and also fallout from the trouble
in the Euro-zone.
The Canadian economy does rely on a good percentage of its growth on
exports, and by having a higher Canadian Dollar, Canadian exports
become less competitive and as a result the Canadian current account
is posting 20-year deficits.
"Net exports are projected to contribute more to growth going
forward, supported by stronger U.S. activity and global demand for
commodities. However, the cumulative effects of the persistent
strength in the Canadian dollar and Canada's poor relative
productivity performance are restraining this recovery in net exports
and contributing to a widening of Canada's current account deficit
to a 20-year high."
On the bright side, the global economy is recovering faster than
expected according to the statement, helped by a pick up in US
consumer spending and some better growth in Europe. However,
"Ongoing challenges associated with sovereign and bank balance
sheets will limit the pace of the European recovery and are a
significant source of uncertainty to the global outlook."
The bank expected the economy to expand 2.4% in 2011 and 2.8% in 2012,
which was better than it had forecast in its October Monetary Policy
Report. Underlying inflation remained subdued and inflation
expectations remain "well-anchored". The Bank puts out its next
MPR tomorrow (Wed. 1/19).
*USD/CAD Surges Higher Post-Statement*
The currency markets decided to focus on the last sentence of the
statement: "Any further reduction in monetary policy stimulus would
need to be carefully considered." That gives the implication that
the bank will wait a few more meetings before considering tightening
monetary policy. The first chance for a hike therefore could be March.
We will have to see if the situation in Europe improves as we see that
is a major focal point for policy makers.
The concerns about the strong Canadian Dollar and the uncertainties
about the Euro-zone also weighed on the USD/CAD pair following the
release. We should also keep an eye on commodity prices, as worries
that China may tighten its monetary policy and cool growth could have
an adverse impact on commodities. We see that oil prices remain above
$90 a barrel, and the move above that level was coincident with the
USD/CAD falling below parity.
The statement was a bit of splash of cold water to investors that had
been expecting to see the Bank of Canada perhaps begin to soften its
stance to raising interest rates, thanks to some stronger readings
from both the Canadian economy and from its main trading partner –
the US.
The USD/CAD which had moved below the 0.99 level in 2011, saw a strong
move in today's session, though we still remain within the context
of a downtrend for the pair. From a low overnight near 0.9835 (a 2 and
1/2 year low), we rose all the way to 0.9930. Out next important pivot
to the topside is the 0.9970 area. We can see that we broke out of a
downward sloping channel we had set up during the beginning of the
week.
From my perspective this is a bump in the road for the Bank of Canada.
With events in Europe seeming to calm a bit, growth in the US picking
up, and oil prices higher, the CAD should remain supported. Therefore,
this move upward should prove to be temporary. What today's release
might do however is cap the gains the CAD may have going forward until
we get a more hawkish BOC. We didn't get that today and instead, as
has been the case over the past month or two, the statement tried to
undermine CAD strength.
Source: Fxstreet.com
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