The Canadian Central Bank is Not Expected to Act in 2016
The Bank of Canada (BoC) will be thankful for a more stable macroeconomic environment when it releases the interest rate statement on Wednesday, July 13 at 10:00 am EDT. The central bank is expected to hold its benchmark interest rate unchanged at the all time low of 0.50 percent. The focus for CAD traders will be the publication of the quarterly Monetary Policy Report. Since there is little action forecasted from the BoC in the third quarter the governor Stephen Poloz could try to use dovish language to put downward pressure on the loonie in an effort to boost exports. The BoC governor will hold a press conference at 11:15 am EDT.
The BoC was proactive in 2015 with two rate cuts ahead of the tumble in oil prices. This year the central bank has been more patient amid rising macro headwinds. The factors that are outside Canada’s control such as the price of energy and market uncertainty triggered by political events in Europe, have lead to a depreciation of the CAD. The biggest factor supporting the CAD has been the apparent stability of U.S. growth and the low exposure to British trade. The BoC would only take its proactive stance if energy prices appear to be headed lower and would intervene with monetary policy if needed.
The combination of a new British Prime Minister coming sooner rather than later, the Japanese elections win by the ruling LDP have stabilized markets with the promise of further stimulus and reduced the risk aversion trend that followed the Brexit vote outcome. Canada is still seen as the fiscal stimulus pilot program of major economies with the BoC expected to wait until fall before making a monetary policy change.
The USD/CAD lost 0.637 percent in the last 24 hours. The pair is trading at 1.3027 ahead of the release of the rate statement by the Bank of Canada on Wednesday. The news at the start of the trading week have put the USD on the back foot as risk aversion has diminished and with it the appeal of the dollar as a safe haven. Canadian employment is diverging from the resilient U.S. jobs sector so a full on CAD rally is not expected given the negative outlook on the resource dependant economy.
The Canadian Labour Force survey released at the same time of the monster U.S. non farm payrolls (NFP) report shows a drop in unemployment rate to 6.8 percent even as the economy lost 700 jobs this month. The lower unemployment rate is explained by a drop in the participation rate to a 16 year low of 65.5 percent. The divergent path of employment in both sides of the border plus the softness of energy prices will keep the CAD under pressure.
The West Texas oil rose 0.594 percent in the last 24 hours. The price of energy is trading at $45.59 after crude has rebounded thanks to the weakness of the USD. The Organization of the Petroleum Exporting Countries (OPEC) downgraded its global growth forecast to 3 percent in 2017 citing the impact the Brexit vote will have on global growth. The OPEC is still maintaining its forecast for global demand at 1.2 million barrels a day, which is 300,000 higher than the 10 year average.
The biggest indicator for the CAD this week will be the release of the Monetary Policy Report by the Bank of Canada (BoC). The central bank has issued warnings about rising household debt and has tried to curb the number of new mortgages as low rates has driven housing prices higher which would not make a rate cut their preferred option. The global macro headwinds have forced the BoC into a corner where waiting seems to be the only option. Waiting for the effects of the Canadian government stimulus program announced in March and looking to the Fed who is also exercising its own caution regarding rates as global growth is subdued. There bigger expectations of easing from the central banks of Japan and the United Kingdom as deflation concerns are higher in the short term.
Market events to watch this week:
Wednesday, July 13
10:00am CAD BOC Monetary Policy Report
10:00am CAD BOC Rate Statement
10:00am CAD Overnight Rate
11:15am CAD BOC Press Conference
Thursday, June 30
4:30am GBP Current Account
8:30am CAD GDP m/m
8:30am USD Unemployment Claims
9:00pm CNY Manufacturing PMI
9:45pm CNY Caixin Manufacturing PMI
Friday, July 1
4:30am GBP Manufacturing PMI
10:00am USD ISM Manufacturing PMI
*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar
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Alfonso Esparza
trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
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