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Forex News: Canadian Dollar Rallies After Hawkish BoC

Forex News: Canadian Dollar Rallies After Hawkish BoC

2012-12-04 15:20:00
Christopher Vecchio, CFA, Senior Strategist
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THE TAKEAWAY: CAD Bank of Canada Rate Decision > Hawkish Policy Statement > USD/CAD BEARISH

The Bank of Canada Rate Decision went off without much of a bang, with the world’s most stable major central bank keeping its key rate on hold at 1.00%, its Bank Rate at 1.25%, and its deposit rate at 0.75%. Nevertheless, the BoC’s statement accompanying the decision was riddled with hawkish commentary, given its bias for commending the Canadian economy and blaming exogenous actors for most economic weakness.

Presented without commentary is the statement itemized by topic:

On the global economy:

  • The economic expansion in the United States is progressing at a gradual pace and is being held back by uncertainty related to the fiscal cliff.
  • Europe remains in recession.
  • Chinese growth appears to be stabilizing.
  • Global financial conditions remain stimulative, though vulnerable to major shocks from the U.S. or Europe.

On the Canadian economy:

  • Economic activity in the third quarter was weak, owing in part to transitory disruptions in the energy sector.
  • The pace of economic growth is expected to pick up through 2013. The expansion is expected to be driven mainly by growth in consumption and business investment, reflecting very stimulative domestic financial conditions.
  • Housing activity is beginning to decline from historically high levels. While the household debt burden continues to rise, growth in household credit has slowed. It is too early, however, to determine whether the moderation in housing activity and credit growth will be sustained.
  • Canadian exports are expected to pick up gradually but continue to be restrained by weak foreign demand and ongoing competitiveness challenges. These challenges include the persistent strength of the Canadian dollar, which is being influenced by safe haven flows and spillovers from global monetary policy.

On inflation:

  • Both total and core inflation are expected to increase and return to 2 per cent over the course of the next 12 months as the economy gradually absorbs the current small degree of slack, the growth of labour compensation remains moderate and inflation expectations stay well-anchored.

The BoC concluded, that: “Over time, some modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2 per cent inflation target. The timing and degree of any such withdrawal will be weighed carefully against global and domestic developments, including the evolution of imbalances in the household sector.” This statement proved to be hawkish enough to spur Canadian Dollar strength.

USD/CAD 1-minute Chart: December 4, 2012

Forex_News_Canadian_Dollar_Rallies_After_Hawkish_BoC_forex_news_currency_trading_body_Picture_1.png, Forex News: Canadian Dollar Rallies After Hawkish BoC

Charts Created using Marketscope – Prepared by Christopher Vecchio

Following the release, the USD/CAD fell from 0.9948 to as low as 0.9920, nearly without pause. Still, the drop was only modest, as risk-appetite trends were failing to make meaningful headway at the time the BoC Rate Decision was announced.

--- Written by Christopher Vecchio, Currency Analyst

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

Follow him on Twitter at @CVecchioFX

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