Bank of Canada to Hold Awaiting Federal Budget

The Canadian Central Bank is not Expected to Make Any Changes Ahead of the Federal Budget on March 22

The Canadian economy was able to endure the fall out from the 2008 credit crisis due to stable crude prices. Once oil tumbled it sent shockwaves through the resource based economy. The Bank of Canada (BoC) gets credit by anticipating a sharp drop and proactively cutting rates twice in 2015 leaving the Canadian benchmark rate at all time low 0.50 percent. Those moves combined with the U.S. Federal Reserve’s much awaited rate hike in December weakened the loonie. BoC Governor Stephen Poloz commented on the benefit to exports that a weak currency would have and appears willing to ease further to achieve this goal. The changing conditions in January has put the Fed on hold for future rate hikes and the dramatic drop of oil prices had the market looking at the Canadian central bank for guidance.

The Canadian dollar quickly lost 5.27 percent versus the dollar in the first two weeks of 2016. The loonie has been highly correlated to oil shocks and in the first two months of the year it was tied at the hip with oil prices. The BoC opted to hold rates in January for the release of the Government’s budget to be released on March 22.

The Canadian central bank will release its rate statement on Wednesday, March 9 at 10:00 am EST. The BoC is widely expected to keep the benchmark interest rate unchanged again opting to wait for the effects of the fiscal stimulus package to be announced later in March before deciding to modify its monetary policy. There will be no monetary policy report to accompany the rate statement.

The loonie has recovered nearly 10 percent since the USD/CAD touched a high of 1.4602. Strong economic indicators, the rise of oil prices and the growing doubts about a Fed rate hike in the first half of 2016 have boosted the Canadian currency. The central bank decision takes a back seat to the Federal budget as the BoC has little runway left. The market is now focused on the Federal budget, and the central bank could make a move no earlier than October after the effects of the expected stimulus impact the economy.

CAD Traders Focusing on Federal Budget for Size of Stimulus

The Liberal party won the Canadian elections last year with a promise to boost spending in infrastructure to stimulate growth and diversity the economy from its resource dependancy. The budget will be released on March 22 and market watchers anticipate the BoC will stick to the script and wait for the imminent arrival of the Federal budget.

Oil prices are stable after the Organization of the Petroleum Exporting Countries (OPEC) members (minus Iran) and Russia are planning a summit later this month to discuss a potential output freeze. All things considered the world will continue to be awash in the black stuff after Iran ups its production, but the effort from producers to stop the oil price decline appears to be working. Given how hard it was to get producers to agree to discuss the freeze it would not be a shock if it all ends badly.

Economic indicators out of Canada have strengthened the loonie versus the USD. Canadian exports rose for a third consecutive month in January. The 1 percent rise in exports made the Trade deficit lower than expected. The non resource nature of the growth in exports (consumer goods and vehicles) boosted the CAD as it validates the words of the BoC ahead of its rate statement on Wednesday. Canadian Prime Minister Justin Trudeau will start an official visit to the United States that same day.

CAD events to watch this week:

Wednesday, March 9
10:00 am CAD BOC Rate Statement
10:30 am USD Crude Oil Inventories
Thursday, March 10
8:30 am CAD NHPI m/m
8:30 am CAD Capacity Utilization Rate
4:15 pm CAD BOC Gov Poloz Speaks
Friday, March 11
8:30 am CAD Employment Change

*All times EST