BOC Expected to Hold After Proactive Cuts Validated by Economic Data

Trade balance, employment and a slight touch of recession showed Bank of Canada made the right call with its monetary policy this year

The week of August 31 to September 4 gave the market a plethora of Canadian economic indicators to guide traders. From the politically charged gross domestic product data earlier in the week to the employment data and purchasing managers index (PMI) on Friday. The Canadian economy gave strong arguments about the Bank of Canada (BOC) strategy working to boost growth. The two BOC interest rate cuts appear to have stimulated exports and improved Canada’s GDP, but ultimately not enough to avoid a technical recession.

BOC Governor Stephen Poloz is expected to hold rates on Wednesday, September 9 at 10:00 am EDT. The Canadian benchmark rate stands at 0.50 percent and with the uncertainty of a Federal Reserve interest rate hike it would be prudent for Mr. Poloz to wait until the American central bank moves first.

Canadian Economy Falls into Technical Recession

The market widely anticipated Canada to fall into a technical recession after the final monthly data point of the second quarter was added to the quarterly tally. While the Canadian economy did fall into a recession, two consecutive quarters of negative growth, June’s 0.5 percent growth managed to make it a moderate recession with a 0.5 contraction. The fact that Canada managed to grow above expectations as the price of oil continued to be pressured downwards by a supply glut gives the economy a strong chance to return to growth in the next quarter.

Trade Deficit Shrinks in July

Canadian trade balance data published on Thursday, September 3 showed the deficit narrow to $593 million in July. Economists had forecasted a $1.3 billion trade deficit for the same month. The weaker loonie and a more resilient U.S. economy were the main drivers. The Bank of Canada (BOC) can take some of the credit as their proactive monetary policy decisions have been timely, in particular if taking into consideration the Fed’s patience regarding an interest rate hike.

Strong Employment Defies Low Oil Price and Recession

Released at the same time as the more closely followed U.S. NFP, Canada published its own employment change data. The Canadian economy added 12,000 jobs when the forecast called for a loss of 4,800. More Canadians have entered the workforce which pushed the unemployment rate to 7 percent from the previous 6.8 percent. While the news of a recession made more headlines given the impact it can have on the upcoming elections, Canadian employment is also validating the decision by Governor Stephen Poloz to cut rates twice in 2015 to give exports a competitive advantage offsetting the losses in the energy sector.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza