Bank Of Canada Maintains Current Policy, Curbs Rate Expectations
THE TAKEWAY: Bank of Canada Keeps Rate At 1.00% > Curbs Speculation For Higher Rates > Canadian Dollar Weakens
After maintaining its current policy, the BoC said the need for a higher interest rate ‘has diminished,’ and went onto say that the downside risks have materialized from the July policy meeting after the economy unexpectedly contracted in the second quarter. Despite the slowdown in economic activity, the central bank continues to see a resumption of growth in the second-half of 2011, and expects price pressures to moderate as the region faces a slowing recovery. Moreover, the BoC reiterated that the marked appreciation in the local currency remains a ‘challenge’ for the region, and noted that the fundamental outlook for the world economy has deteriorated in light of the sovereign debt crisis in Europe paired with the tepid pace of growth in the U.S.
The USD/CAD spiked to a fresh daily high of 0.9909 immediately following the announcement, and the market reaction may gather pace throughout the North American trade as market participants scale back expectations for higher interest rates. In turn, the near-term rally in the USD/CAD may gather pace, and the exchange rate may make another run at parity as the near-term outlook for Canada deteriorates. However, the shift in risk sentiment may prop up the Canadian dollar and the loonie may continue to recoup the losses from earlier this month as market participants increase their appetite for yields.
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