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Canadian Dollar Strengthens as Bank of Canada Keeps Rate at 1.00%

Canadian Dollar Strengthens as Bank of Canada Keeps Rate at 1.00%

Christopher Vecchio, CFA, Senior Strategist

THE TAKEAWAY: CAD Bank of Canada Rate Decision > Overnight Interest Rate Unchanged at 1.00% > USDCAD BEARISH

The Bank of Canada kept its main refinancing rate on hold at 1.00% today, as expected, while similarly leaving its Bank Rate at 1.25% and the deposit rate at 0.75%. As the Bank of Canada noted in its policy statement, the main reasons for keeping the main rate on hold have more due to with exogenous factors and less to do with the Canadian growth picture itself.

Governor Mark Carney said that “the United States continues at a gradual but somewhat slower pace, developments in Europe point to a renewed contraction. In China and other emerging economies, the deceleration in growth has been greater than anticipated, reflecting past policy tightening and weaker external demand.” The main headwind to confidence and growth, the Euro-zone crisis, has led the Bank of Canada’s “base case projection assumes that the European crisis will continue to be contained, although this assumption is subject to downside risks.”

However, “domestic factors are expected to support moderate growth in Canada.” Governor Carney finds that “consumption and business investment are expected to be the primary drivers of growth.” “Lower commodity prices,” influenced by the slowdowns in China, Europe, and the US will hurt “incomes and wealth,” as well as “record-high household debt.”

Presented below without commentary are the Bank of Canada’s outlook on inflation and growth:

  • Core inflation is forecast to remain around 2% over the projection horizon as the economy operates near its production potential, growth in labour compensation stays moderate and inflation expectations remain well anchored.
  • Given the recent drop in gasoline prices and with futures prices suggesting persistently lower oil prices, the Bank expects total CPI inflation to remain noticeably below the 2% target over the coming year before returning to target around mid-2013.
  • The economy will grow by 2.1% in 2012, 2.3% in 2013 and 2.5% in 2014.
  • The economy is expected to reach full capacity in the second half of 2013, thus operating with a small amount of slack for somewhat longer than previously anticipated.

USDCAD1-minute Chart: July 17, 2012

Canadian_Dollar_Strengthens_as_Bank_of_Canada_Keeps_Rate_at_1.00_body_Picture_1.png, Canadian Dollar Strengthens as Bank of Canada Keeps Rate at 1.00%

Charts Created using Marketscope – Prepared by Christopher Vecchio

Following the release, the Canadian Dollar strengthened across the board, as it’s evident the Bank of Canada feels strongly about the state of the Canadian economy and the rhetoric within the statement suggests that growth would be stronger were it not for a slowing major economies across the globe. The USDCAD slipped lower from 1.0149 to as low as 1.0139, at the time this report was written, though the Canadian Dollar’s fundamental posture is certainly bullish. Similar price action was observed in the CADJPY, which moved higher following the release as well.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com

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