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Canadian Dollar Tumbles as Central Bank Indicates Slow Export Development
April 17, 2014 5:40 amVideo
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The Canadian dollar reached the weakest performing mark in more than a week after the Bank of Canada said its next action on interest rates could be an increase or a decrease as a estimates pickup in business investment has been slow to materialize.
The currency plunged versus most of its major counterparts as the central bank held its standard interest rate at 1 percent for the 29th straight policy assembly, as calculated by all 18 economists in a Bloomberg News poll. The economy’s recovery “hinges critically” on a shift in demand from indebted consumers to exports and business investment, which will be supported by a not so stable Canadian dollar and surging U.S. orders, the bank said as it bring down its development projection for the year.
“The Bank of Canada statement was neutral, but I’d say it tilts towards the dovish, and I think a lower Canadian dollar is certainly an appropriate take from this statement,” said David Watt, chief economist at the Canadian unit of HSBC Holdings Plc. “They are less confident about the export and business investment rotation they’ve talked about.”
The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, plummeted as much as 0.5 percent to C$1.1034 per U.S. dollar, the worst since April 4, before exchanging at C$1.1011 at 5:00 p.m. in Toronto, missed 0.3 percent. One loonie purchases 90.82 U.S. cents.
The Canadian dollar has been the weakest-moving of the greenback’s 16 major counterparts this year as shifts in the Bank of Canada’s outlook triggered bets it would signal a need for easier financial policy to prompt inflation and lift exports.
Development Outlook
Bank of Canada Governor Stephen Poloz stated that he was continuing his “neutral” view on the direction of the key policy rate despite boosting the bank’s inflation projections for the year because the pickup in consumer financial values was only transitory.
Asked in a press conference following the rate decision if he was shutting the door on bringing down his policy interest rate, Poloz said, “No, we are neutral, and that means rate cuts can not be taken off the table at this stage.”
Gross domestic product will zoom 2.3 percent higher this year, the bank said, down from a January estimate of 2.5 percent, on a trimmed down contribution by business investment. The 2015 development outlook stayed at 2.5 percent, and today’s Monetary Policy Report gave the first projection of 2016 development at 2.2 percent. The economy will achieve its full capacity over the next two years, the bank predicts.
The bank’s estimates assumes the currency will stay in its current trading range around 91 U.S. cents.
Inflation Projection
“There’s mention of a 91 cent level as being an area where the bank believes dollar/CAD will remain anchored,” Brad Schruder, director of foreign exchange at Bank of Montreal, said by phone from Toronto. “I suspect that’s why you’re seeing dollar/CAD hang around this C$1.10 level, which is the equivalent of 91 cents.”
The bank moved up its estimate of when inflation will return to its 2 percent goal to the first quarter of 2015 from the last three months. The core inflation rate won’t touch 2 percent until the beginning of 2016.
While energy costs are hiking and a less stable currency is increasing financial values of imported goods, policy makers are focusing on the “subdued” rate of core inflation that excludes volatile items, the bank said.
Inflation has been under the Bank of Canada’s 2 percent goal for 22 consecutive months, recording 1.1 percent on an annualized basis in February.
“He certainly did highlight that they have not ruled out the possibility of rate cuts in Canada and spent a lot of time talking about inflation,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia, by phone from Toronto. “We have a Bank of Canada that’s neutral, we have one that’s very focused on the Canadian dollar at current levels.”
The material has been provided by InstaForex Company – www.instaforex.com
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