USDCAD Soars After Bank of Canada Strikes Dovish Tone

Gladys Abbott
March 10, 2019

The first half of 2019, the bank added, is now on track to produce weaker numbers than its projection two months ago.

Given the mixed picture, the central bank said it would "take time to gauge the persistence of below-potential growth and the implications for the inflation outlook".

Data showed Canada racked up a record trade deficit of C$4.59 billion ($3.43 billion) in December as the value of exports slumped by the most in over 11 years due to lower crude oil prices.

"With increased uncertainty about the timing of future rate increases, Governing Council will be watching closely developments in household spending, oil markets and global trade policy", the statement said.

Not only has the slowdown been deeper than expected, but Statistics Canada's downward revisions to growth in the first half of previous year suggest there may have been more excess capacity going into the slump than previously thought.

At a governing council meeting today (March 6), policy-makers chose to keep the overnight rate at 1.75%, the bank rate at 2% and the deposit rate at 1.5%.

The Canadian dollar dipped for sixth consecutive day and North American markets fell Thursday after global central banks continued convey a dovish tone about raising interest rates.

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The loonie fell 0.7 per cent to $1.3439 per USA dollar, touching the weakest since January 4 and paring its 2019 advance to 1.5 per cent. Yields on two-year Canadian government bonds dropped 8 basis points to 1.66 per cent, the lowest since December. The Bank had forecast just 0.8% q/q saar growth for 2019Q1 in January. The weak end to 2018 and soft momentum heading into 2019 clearly has the Bank of Canada anxious about the health of the Canadian economy.

The Bank of Canada maintained its trend-setting interest rate at 1.75 per cent Wednesday, as expected.

"Against this backdrop, I'd expect the hurdle rate to resume rate hikes to be quite high", said Sophia Drossos, a former economist at the U.S. Federal Reserve and Morgan Stanley, who now runs her own advisory firm in NY.

To be sure, Statistics Canada reported late in February that non-residential investment will rise 2.5 per cent in 2019, according to a survey of companies, compared with increases of 2.5 per cent previous year and 4.3 per cent in 2017. There have also been doubts whether Poloz will raise the rate again this year - or whether his next move will even be a hike.

Looking ahead, however, Patterson said the Bank of Canada is optimistic that economic growth will build new momentum in the second half of 2019, thanks in large part to the still-strong employment conditions and improving wages. We will have more to say at our next interest rate announcement in April. Trade tensions and uncertainty continue to dampen these components of growth.

The rate decision report highlighted the recent slowdown experienced in the Canadian economy saying, "the fourth quarter slowdown was sharper, more broadly based than forecast".

"It is clear that global economic prospects would be buoyed by the resolution of trade conflicts", said the bank.

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