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Bank of Canada Leaves Rate Unchanged

As predicted, the Bank of Canada (BoC) kept interest rates unchanged, maintaining its status at 0.50%.  BoC’s statement accompanying the rate announcement continued to highlight “material slack” in the labor market, and its stark comparison with the US, where it is close to full employment. Unexpected GDP growth in recent months was attributed to a temporary boost in spending in the oil and gas sector, and effects of the Canada Child Benefit on consumer spending. The BoC also acknowledged strong growth in the labor market, which has now witnessed job growth higher than initially projected in the last eight months. The residential housing market has been stronger than expected, however, export growth has been uneven due to ongoing competition.  Despite the growth of the Canadian economy, the BoC cautioned, “business investment remains well below what could be expected at this stage in the recovery.” They concluded, “it is too early to conclude that the economy is on a sustainable growth path.”  

Bank of Canada revised its 2017 growth forecast to 2.5%, from its earlier estimate of 2.1%.  This is well above 2016’s GDP growth of 1.4%, and 0.9% respectively.  The current move higher in inflation to its target level of 2% was attributed to effects of higher oil prices and carbon pricing measures in two provinces as well as other temporary factors. The BoC considers inflationary pressures to be benign, and CPI is expected to dip lower as these temporary factors change. 

At the press conference, Governor Poloz stated that the stance of monetary policy has become “decidedly neutral,” and the committee did not consider the possibility of monetary easing. Governor Poloz downplayed strong economic data – strong jobs growth, three consecutive months of trade surplus, and strength in consumer spending in recent months - instead focusing on “excess available capacity” in the economy. This time around the theme changed towards acknowledging the strong set of economic numbers, warning it could be due to temporary factors and the sustainability of these economic numbers could be in doubt in the coming months.

The issue of surging house prices in the Greater Toronto Area was also addressed in the press conference.  Governor Poloz highlighted the increasing role of speculation in the 30% price surge. He acknowledged that strong employment and immigration growth has increased demand for housing, and supply has not kept up with this demand. Furthermore, this fundamental demand-supply cannot justify this big surge in prices.  He also stated that demand is driven more by speculative activity and investor demand, as opposed to actual homeowners. Poloz observed that house prices fluctuate, and the current pace of price increase is unlikely to be sustained.

Market Reaction

The neutral tone of the BoC means that no change higher or lower is expected in Canadian interest rates in the foreseeable future. The mention that no rate cut was discussed clearly moves the BoC’s outlook for interest rates to neutral from “easing bias.”  Last October, and January of this year, BoC Governor mentioned the committee discussed the possibility of increased monetary stimulus if the economic situation deteriorated further.

Canadian Bond government bond yields lowered around 1.50% for the day, last seen in November of last year. The Canadian Dollar firmed up sharply due to the neutral sentiment, and increase in growth traded below 1.300. The gains were short-lived, eventually shooting back above 1.3300. Concerns raised by US President Trump regarding the strength of the US Dollar then sent the Canadian Dollar plunging back below 1.3300.


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FX Currency Forecasts

  2019
Currency Spot Q1 Q2 Q3 Q4
USD/CAD 1.3437 1.30 1.31 1.32 1.34
EUR/USD 1.1204 1.15 1.17 1.19 1.22
USD/JPY 109.3050 107 106 106 15
GBP/USD 1.2710 1.32 1.36 1.40 1.44
USD/MXN 19.0497 19.10 19.40 20.10 19.90
USD/CNY 6.9002 6.72 6.68 6.63 6.58
AUD/USD .6926 0.74 0.75 0.76 0.77
USD/INR 69.3725 71.00 70.75 70.50 70.25
EUR/CAD 1.5055 1.50 1.53 1.57 1.63
GBP/CAD 1.7077 1.72 1.78 1.85 1.93
CAD/JPY 81.3493 82 81 80 78

  2020
Currency Spot Q1 Q2 Q3 Q4
USD/CAD 1.3437 1.30 1.31 1.32 1.34
EUR/USD 1.1204 1.15 1.17 1.19 1.22
USD/JPY 109.3050 107 106 106 15
GBP/USD 1.2710 1.32 1.36 1.40 1.44
USD/MXN 19.0497 19.10 19.40 20.10 19.90
USD/CNY 6.9002 6.72 6.68 6.63 6.58
AUD/USD .6926 0.74 0.75 0.76 0.77
USD/INR 69.3725 71.00 70.75 70.50 70.25
EUR/CAD 1.5055 1.50 1.53 1.57 1.63
GBP/CAD 1.7077 1.72 1.78 1.85 1.93
CAD/JPY 81.3493 82 81 80 78
  2019 2020
Currency Spot Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
USD/CAD 1.3437 1.30 1.31 1.32 1.34 1.33 1.32 1.33 1.32
EUR/USD 1.1204 1.15 1.17 1.19 1.22 1.25 1.26 1.25 1.24
USD/JPY 109.3050 107 106 106 15 104 103 101 100
GBP/USD 1.2710 1.32 1.36 1.40 1.44 1.45 1.46 1.45 1.44
USD/MXN 19.0497 19.10 19.40 20.10 19.90 20.10 20.40 20.60 20.70
USD/CNY 6.9002 6.72 6.68 6.63 6.58 6.53 6.50 6.47 6.44
AUD/USD .6926 0.74 0.75 0.76 0.77 0.78 0.79 0.79 0.80
USD/INR 69.3725 71.00 70.75 70.50 70.25 70.00 69.75 69.50 69.25
EUR/CAD 1.5055 1.50 1.53 1.57 1.63 1.66 1.66 1.66 1.64
GBP/CAD 1.7077 1.72 1.78 1.85 1.93 1.93 1.93 1.93 1.90
CAD/JPY 81.3493 82 81 80 78 78 78 76 75

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