The US dollar closed at its lowest level against its Canadian counterpart, the loonie, since last October in the US on Monday, and USD/CAD is now threatening nine-month lows ahead of a decision on interest rates from the Bank of Canada on Wednesday.
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Economists expect Canada’s central bank to hold its key rate at 0.50%.
With next year’s growth still at 2.3%, the output gap is projected to close in the second half of 2017, still a long way off and a reason why we don’t see the Bank raising rates until Q4 next year. The new government under Prime Minister Justin Trudeau has recently announced its new budget which includes substantial government spending and the report will include an analysis of the impact of the fiscal stimulus on the economic outlook.
But market players predict Governor Stephen Poloz will use a press conference at 11:15 a.m. EDT (1515 GMT) to talk up economic risks and play down signs of stronger growth in order to help keep a recovering currency from choking off exports.
CAD still going strong.
Two rates cuts from the Bank of Canada past year didn’t do the currency any upside favours, but the collapse in crude gets most of the downside credit for the dollar’s 2015 dive.
“The Canadian economy’s complex structural adjustment to the oil shock is ongoing and will dampen growth throughout the bank’s projection horizon”, the bank said.
“The Bank of Canada may revise up its GDP forecasts in light of recent economic data and the more stimulative budget”, said Brown Brothers Harriman in a report. The Bank now projects real GDP growth of 1.7 per cent in 2016, 2.3 per cent in 2017 and 2.0 per cent in 2018. The central bank has been regularly downgrading Canada’s growth potential since the 2008 financial crisis.
Elsewhere in commodities, May natural gas was down seven cents at US$1.92 per mmBtu, while May copper was unchanged at US$2.09 a pound and June gold rose $13.60 to US$1,257.40 a troy ounce.
Most supportively from the Fed has been a recent speech from Bank of New York President William Dudley, who has stated that the “American Dream” of widespread social mobility is actually more likely to be realised in Canada, among other places, than actuality is in the United States themselves. The Bank’s Governing Council judges that the overall balance of risks remains within the zone for which the current stance of monetary policy is appropriate, and the target for the overnight rate remains at 1/2 per cent. In January, the International Monetary Fund predicated the country’s growth would be 1.7 per cent in 2016 and 2.1 per cent in 2017. Non-resource exports are expected to strengthen, but their profile is weaker than previously projected, in part because of slower foreign demand growth and the higher Canadian dollar.
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With the US economy creating jobs and inflation firming up, CIBC warned that Canadian dollar bulls need to be “careful of a hawkish turn from the Fed”.
