BoC’s Carney Going Solo?

The market expected the Bank of Canada to sit this meeting out. They did not disappoint any observers by keeping rates on hold at +1%. It is the 14th consecutive meet where rates have not changed. However, governor Carney has indicated that it may raise interest rates with the domestic economic recovery proceeding as forecast, despite global risks having increased.

The governor reinforced his tightening bias by repeating that “some modest withdrawal of the present considerable monetary-policy stimulus may become appropriate” to achieve his fellow policy colleagues +2% inflation target. His open gesture did come with its own disclaimer, similar to all other CBank announcements, by reiterating that the “timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.”

The BoC believe that its growth prospects remain “largely consistent with expectations” even with the global outlook “having weakened in recent weeks.” Analysts worry that the world’s 10th largest economy may be hindered by the deepening debt crisis in Europe, slowing US job growth (+70% of Canadian exports cross the border) and a cooling emerging market. Collectively, thus far, all these reasons have been able to cut the prices of commodities that the country exports. This energy rich economy is hyper sensitive to global growth concerns. A percentage of the futures market is actually pricing in an ease by year end, which directly opposes the CBank, who still expects the next move to be a hike, but it is acknowledging that there are
grounds to question whether the economy will be strong enough to warrant that move.

The loonie only managed to strengthen ever so slightly after the announcement, getting the loony bulls to test the dynamic strength of this resourced based, pseudo reserve currency. The global macroeconomic landscape, especially in the euro-zone and within Spain, has capital markets on the back foot. Investors continue to gravitate towards risk aversion trading strategies that currently requires cheaper ‘greenbacks’ on pullbacks.

From the retail traders perspective, they continue to ride the CAD risk wave and this despite a market trading a few cents against them. How strong is their risk tolerance?

Bank of Canada

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