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Canada: The Canadian dollar under the spotlights

Tue, Oct 20 2009, 18:18 GMT
by Economic and Strategy Team

National Bank of Canada


As expected the Bank of Canada left the overnight rate unchanged at 0.25 % and maintained its conditional commitment to keep the rate at the current level until the end of Q2 2010. 

Although, the Bank’s assessment of recent economic conditions, both domestically and abroad, sounds more upbeat than in September, the outlook for 2011 was nevertheless downgraded slightly. The Bank now projects the Canadian economy will grow by 3.3% in 2011 compared to 3.5% in the July MPR. The projection for growth next year was left unchanged at 3%. The Bank sees the persistent strength in the Canadian dollar providing enough headwinds to more than fully offset other developments that are proving more favourable than originally expected. Under the new projection, closing the output gap will take one quarter longer than projected in July. Under this scenario, the BoC should not be in a hurry to follow the Australian central bank’s example in front loading its exit strategy from the current policy stance. 

However, we believe conditions are in place for the U.S. economy to improve faster than expected. This will lead to the stabilization of the labour market south of the border and a reassessment of the Fed’s current zero policy stance. This should go a long way in relieving pressures on the Canadian dollar. In such an environment, the loonie will not end up being the drag the BoC is currently expecting. Our scenario suggests market will become sceptical of the BoC’s conditional commitment in coming months.


Published on  Tue, Oct 20 2009, 18:21 GMT

National Bank of Canada  | 1100 University, 11th floor Montreal (Québec) H3B 2G7
http://www.nbc.ca/ | info@nbc.ca

Legal disclaimer and risk disclosure

This presentation may contain certain forward-looking statements about the 2009 Economic and Financial Outlook. Such statements are subject to risk and uncertainties. Actual results may differ materially due to a variety of factors, including legislative or regulatory developments, competition, technological change and economic conditions in Canada, North America or internationally. These and other factors should be considered carefully and readers should not rely unduly on National Bank of Canada’s forward-looking statements. This presentation may not be reproduced in whole or in part, or further distributed or published or referred to in any manner whatsoever, nor may the information, opinions or conclusions contained in it be referred to without in each case the prior express consent of National Bank.

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