The true north is strong and money remains nearly free, after the Bank of Canada chose to hold its key lending rates at 0.5% a few minutes ago. Although this decision was widely expected, dovishness in the accompanying announcement provided the catalyst for a quick flurry of position-squaring in the markets, sending the Canadian dollar on a 30-basis point round-trip in the last few minutes.
In its last scheduled decision of the year, the central bank said, “Uncertainty, which has been undermining business confidence and dampening investment in Canada’s major trading partners, remains undiminished. Following the election in the United States, there has been a rapid back-up in global bond yields, partly reflecting market anticipation of fiscal expansion in a US economy that is near full capacity. Canadian yields have risen significantly in this context”.
Policymakers noted that a “significant amount of economic slack remains in Canada”, with the impact of federal infrastructure spending not yet evident in GDP data. The Bank also sounded a relatively optimistic note on consumption, saying, “While household imbalances continue to rise, these will be mitigated over time by announced changes to housing finance rules”.
Still suffering the aftereffects of more than a decade of commodity price and exchange rate overvaluation, the Canadian economy is tracking the American recovery at a much slower pace than it did historically. Higher oil prices and planned stimulus spending should help to boost growth through the coming year – while overleveraged households and weaker housing markets keep risks skewed to the downside. Given this backdrop, policymakers will likely hold the line on rate increases well into 2018, making monetary policy divergence a core theme in the currency markets for some time.
Bottom Line: Turbulence ahead.
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