Remember that surprise interest rate cut from the Bank of Canada (BOC) early this year? Well, BOC Governor Poloz and his boys decided to pull that same stunt again this week when they lowered the benchmark rate from 0.75% to 0.50%.
Back in January, Poloz explained that their rate cut was just a pre-emptive move to cushion the Canadian economy from the impact of the oil price slump that started mid-2014. In the months that followed, BOC policymakers had been patting themselves on the back for deciding to lower rates as “insurance” and had been assuring forex market watchers that they’re not looking to ease monetary policy again. So much for that!
Fast forward to the middle of this year, Canada’s oil-related economic sectors seemed unable to stay afloat, signaling that the January rate cut probably wasn’t enough. And with another looming oil supply shock on the horizon, BOC officials thought that it was about time they pump up their stimulus efforts.
“Canada’s economy is undergoing a significant and complex adjustment,” the BOC indicated in its official statement. “Additional monetary stimulus is required at this time to help return the economy to full capacity and inflation sustainably to target.” Central bank officials also decided to downgrade their growth forecasts, predicting that the economy will expand by just over 1% in 2015. That’s half its previous GDP estimate of 2% from three months ago!
Other factors that supported their pessimistic outlook were the slowdown in the U.S. and China, along with the sharp plunge in oil investments in Western Canada. Analysts have pointed out that business investment is already down by 16% in the first quarter and could fall by as much as 40% for the year, as investors are holding out for a recovery in crude oil prices.
Unfortunately, an oil price recovery might not happen anytime soon since Iran recently vowed to double its oil production now that the nuclear deal allowed the country’s sanctions to be lifted. This increase in supply could mean another leg lower for crude oil, which might spill over to other commodity prices and set off another global inflation downturn. Since we’ve already witnessed this earlier this year, I thought I’d show y’all how USD/CAD behaved then:
The Loonie had already already been tumbling along with oil prices around the middle of 2014 then the BOC rate cut in January this year gave USD/CAD enough energy to break above the area of interest around 1.1950 to 1.2000. From there, the pair moved up to the next forex resistance at 1.2900 before retreating in a range.
This week’s BOC rate cut seems to be giving USD/CAD a boost past the 1.2900-1.3000 resistance, which suggests that the pair might have its sights set on the next long-term ceiling at 1.4000. The Canadian central bank and economy might welcome a weaker Loonie anyway, as this could spur demand for exports and help keep domestic price levels supported. Besides, a Fed rate hike might still be on the table for December so USD/CAD could be in for gains until the end of the year. Do you agree?