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BOC Speech Jolts Loonie Lower

Don Curren March 13, 2018

The Canadian dollar suffered another wave of weakness Tuesday morning after traders interpreted a speech from Bank of Canada Governor Stephen Poloz as suggesting a more gradual approach to monetary tightening than conveyed in earlier statements.

The Canadian dollar slipped by about 0.3% against its US counterpart after the text of his remarks was released at 10:15 am EST. The shift lower was a significant addition to the loonie’s losses against the greenback in earlier trading Tuesday.

In a key sentence in his speech, Poloz intimated that there’s enough slack in the Canadian economy to enable it to continue expanding without generating inflationary pressures. Since the Canadian central bank’s primary objective is to keep inflation at its 2% target, growth that doesn’t trigger inflation won’t necessarily increase the urgency to raise rates.

“The Canadian economy is carrying untapped potential that could prolong the expansion without causing inflation pressures,” Poloz said.

He said the Bank expects to see increased business investment—both in existing and new companies—and that, along with labor market churn, will create more supply through higher productivity and employment.

Increased productivity is another factor that tends to restrain inflationary pressures.

Poloz didn’t indicate any major policy shift in his remarks, but the  emphasis on low inflation was seen as adding further dovish nuance to the bank’s stance. He sketched a highly positive picture of the Canadian economy in the speech, delivered at Queen’s University in Kingston, Ontario.

“Canada has reached the phase of the economic cycle where investment usually takes over as the lead engine of growth and this capacity-building process becomes central,” Poloz said. “I think of this phase of the cycle as the ‘sweet spot,’ where rising demand actually drives the creation of new supply.”

“With many companies operating near their capacity limits, growing their sales further means increasing investment, leading to the creation of new jobs and increased aggregate supply. Obviously, this is a phase worth nurturing,” he said.

The Bank held its overnight target rate steady at 1.25% at its second policy announcement date of the year last Wednesday.

In its policy statement that day, the Bank said that further rate increases are likely to be appropriate, but also struck a note of caution and indicated it will be monitoring economic data carefully at its proceeds.

“Governing Council will remain cautious in considering future policy adjustments, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation,” the statement said.

Bottom Line: While Bank of Canada Governor Stephen Poloz didn’t suggest any substantial changes to the Bank’s stated policy of raising rates in a cautious fashion, his emphasis on the likely of subdued inflation was seen as dovish by traders, and the already-struggling Canadian dollar came under renewed pressure.

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