If you didn’t get a chance to tune in to the BOC monetary policy statement and see the Loonie’s forex reaction, I got yo back! Here’s a rundown of the takeaways from the event.
As expected, BOC Governor Poloz and his men decided to keep interest rates on hold at 0.75% and maintained its relatively neutral monetary policy bias. Recall that the Canadian central bank already cut interest rates earlier this year in order to limit the negative impact of the oil price slump on the economy, which means that they don’t really see the need to ease monetary policy again for now.
1. Piggyback with U.S. economic recovery
What’s keeping BOC policymakers confident that economic prospects will improve later on is Canada’s close ties with its friendly North American neighbor Uncle Sam. You see, the U.S. is Canada’s BFF when it comes to trade activity, as they exchange approximately $2 billion worth of goods and services daily. Heck, exports to the U.S. comprise roughly 20% of Canada’s GDP!
According to BOC Governor Poloz, the U.S. and Canada are in the same boat right now when it comes to dealing with a temporary slowdown in growth. “The bank expects a return to solid growth in the second quarter,” indicated their official statement. “This will help advance the rotation of demand in Canada toward more exports and business investment.”
2. Still upbeat but wary of risks
With that, the BOC managed to maintain its optimistic economic outlook in saying that consumption is “holding up relatively well” and that credit conditions remain “highly stimulative” for households and businesses.
On more cautious note, Poloz added that annual inflation is currently running at around 1.6% to 1.8% – still a few notches away from the central bank’s 2% target. He also mentioned that “risks to financial stability remain elevated but appear to be evolving as expected.”
3. Watching the Loonie’s forex rallies
Speaking of the Loonie, a bit of jawboning was evident during the latest BOC statement when Poloz suggested that further rallies might weigh on growth and inflation prospects. “The Canadian dollar has strengthened in recent weeks in the context of higher oil prices and a softer U.S. dollar,” he explained. “If these developments are sustained, their net effect will need to be assessed as more data become available in the months ahead.”
Several forex analysts zoomed in on this particular line, interpreting it as a sign that the BOC isn’t too happy about the Canadian dollar’s appreciation. After all, a stronger local currency typically makes imports cheaper and exports more expensive, leading to a double-whammy of weaker domestic price levels and lower export demand.
4. Overall bearish for the Loonie?
Cautious remarks from BOC officials kept Loonie bulls in hiding and allowed the bears to take control of forex price action. This suggests that most market participants thought that the BOC was a little more dovish this time around.
In a nutshell, future monetary policy changes by the BOC hinge on three main factors: 1) oil price trends, 2) U.S. economic performance, and 3) the Canadian dollar’s exchange rate levels – all of which are clouded with a lot of uncertainty.
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