As expected, the Bank of Canada (BOC) kept interest rates on hold at 0.50% in this week’s interest rate statement. But why did the Loonie fall sharply against its forex counterparts after the announcement? Here are the biggest takeaways you should be aware of:
1. Downgraded GDP forecasts for the next two years
Perhaps the biggest factor that led Loonie bears to come out and play was the BOC’s revised outlook for the Canadian economy, as policymakers decided to lower their growth forecasts for 2016 and 2017. From their initial estimate of a 2.3% economic expansion next year and 2.6% GDP growth in 2017, central bank officials downgraded these to just 2% and 2.5% respectively.
2. Falling oil prices could keep weighing on the economy
It’s been over a year since the massive oil slump started yet it looks like the Canadian economy is still reeling from it all. Heck, BOC Governor Stephen Poloz doesn’t seem to be seeing a strong rebound in the energy sector anytime soon, as he admitted that this industry could continue hurting business investment and export revenues.
So far spending in the energy sector has tanked by roughly 40% this year and is expected to tumble by an additional 20% in 2016. The official statement also indicated that the slowdown in China is expected to keep exerting downward pressure on prices of oil and other commodities.
3. CAD depreciation kept inflation supported
On a less downbeat note, BOC officials pointed out that the recent depreciation of the Canadian dollar against most of its forex rivals has been able to offset disinflationary pressures. After all, a falling local currency makes imported goods relatively more expensive (ex: An Apple Watch retailing at around 400 USD would cost more Canadian dollars when USD/CAD is trading at 1.3200 versus at 1.2900), thereby driving up local price levels.
Aside from that, a weaker local currency also makes the country’s exports more affordable, which could then shore up demand. This could imply that the Canadian central bank might not need to announce further interest rate cuts, as they can rely on the weaker Loonie to keep domestic price levels and export activity supported.
4. Interest rates to stay unchanged until mid-2017?
Then again, the BOC isn’t likely to announce any interest rate hikes as well, given the downbeat outlook for the oil industry and both global and domestic growth. For now, BOC Governor Poloz and his gang of policymakers are in a wait-and-see mode, predicting that the Canadian economy won’t be able to return to full capacity until mid-2017.
Besides, Poloz appears to be giving room for the newly elected liberals in the Canadian government to make fiscal policy changes, as the central bank head mentioned that he looks forward to working with Prime Minister Justin Trudeau.
All in all, the October BOC statement was neither too hawkish or too dovish, as the central bank seems to be settling in a neutral stance with a slight downbeat bias. Do you think that this is enough to keep the Loonie weak against its forex peers for the rest of the year? Or will it keep consolidating from here? Hey, that rhymes!