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Loonie Awaits Bank of Canada Decision

Published July 13, 2016
  • The Canadian dollar is trading in a familiar range once again this morning ahead of a key interest rate decision and updated economic forecasts from the Bank of Canada at 10am ET
  • Governor Stephen Poloz is expected to hold the main overnight lending rate at 0.5%, however there is the possibility of a dovish twist either in the statement itself or in the Monetary Policy Report's economic outlook
  • Poloz has consistently championed an export and manufacturing led recovery for Canada driven by an improving US economy and weak Loonie
  • However, this has yet to materialize – and now low commodity prices have exposed the Canadian economy to weaknesses that likely got brushed aside during the boom years 
  • An anemic 108K jobs have been created in Canada in the past year and 77K of those have been part-time, highlighting the difficult road ahead
  • Most manufacturing exports from Canada are comprised of imported goods to some degree, so a weak currency increases production costs which then hurts competitiveness internationally
  • Canadian productivity is lower and labour costs are higher than Mexico or the US which also hurts competitiveness 
  • So without roaring commodity prices, the Canadian export sector will encounter headwinds that necessitate a weak currency and low interest rates
  • It is important to note that the Fed is more likely to raise rates ahead of the BoC, potentially as early as Q4 2016 (although even this is now in doubt) which would remove some of the heavy lifting from Poloz's shoulders
  • We expect him to sound balanced to slightly dovish today and acknowledge the disappointment surrounding the export sector but note the resiliency of the US economy and improving oil prices as positive developments  
  • The real risk for today is that the statement and MPR update deliver a much more dovish tone than expected which would hurt the Loonie and drive USDCAD back into the mid 1.3000's

Chart: USDCAD sideways consolidation continues. USD trying to break out of a bullish ascending triangle formation.