The Bank of Canada (BoC) held the benchmark interest rate at 0.50 percent in the first policy meeting of the year. The market expectations for a rate cut had accelerated given the rapid decline of oil prices and the weakness of global stock markets. The Canadian dollar had followed the price of oil on a downward move and it was speculated that the BoC could cut rates to get ahead of the market. The Canadian government on Tuesday had given no details on the first budget of the Liberal government putting the spotlight squarely on the central bank. BoC Governor Stephen Poloz returned the favor as he specifically mentioned that the bank will await the fiscal boost before it intervenes to further stabilize the Canadian economy.
The announcement of a lack of rate change managed to reverse the upwards trend of the USD/CAD that was on its way to break above 1.4690 and ended up trading below the 1.45 price level after the speech of Governor Poloz and a recovery of oil prices. West Texas oil had another volatile day as concerns about oversupply remain. The price fell below $26.70 prompting commodity currencies to tumble, but it managed to recover to near $28. In the last 24 hours oil still was 1.89 percent lower, with no signs of potential price stability out of the Organization of the Petroleum Exporting Countries (OPEC) members or U.S. shale producers.
The USD/CAD fell 0.51 percent as the Canadian dollar appreciated thanks to the rhetoric of the Bank of Canada. The market’s focus is now on the March budget to be delivered by the Liberal government. The campaign that won them the election stressed investment that would boost growth but put Canada on a deficit. As it turns out the Conservative government was already at a deficit, so its just a question of how much stimulus does Prime Minister Trudeau is willing to inject to help Canada withstand the heavy headwinds it faces. Governor Poloz said that the BoC was considering a rate cut, but will also be awaiting the effect of fiscal policy before committing to another rate cut.
Canada continues to be close to a recession and the central bank opted to wait as market conditions deteriorated too quickly to evaluate if the factors are permanent or temporary. The BoC has a limited runway of cuts it can make, and although it has hinted at unconventional policies it is awaiting the unveiling of the Government’s fiscal package which could be quite significant.
The Bank of Canada reduced growth forecasts for 2016 from 2 percent down to 1.4 percent given the rout in commodity prices and the failure of exporting industries to increase output to offset the losses. The central bank does remain optimistic in the long term as the 2017 forecast was only downgrades slightly from 2.5 percent o 2.4 percent.
CAD events to watch this week:
Friday, January 22
8:30am CAD Core CPI m/m
*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar
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