The Bank of Canada is ahead of almost every other developed
nation central bank in terms of when it expects to normalise monetary policy (raise
interest rates). The fact that it is even discussing it is your first clue, as
conversations within central banks such as the Bank of England, Reserve Bank of
Australia, the European Central Bank and the Riskbank are slanted towards rate
cuts, not rate hikes. If it’s not rate cuts, then it’s more QE from the likes
of the US Federal Reserve and the Bank of Japan, whose base rates are already
at rock bottom levels.
Last year’s Bank of Canada rhetoric pointed towards a rate
hike this year. However, the slowdown seen in the US at the end of 2012 has
contributed to softer growth in its northern neighbour. Canadian growth has
consistently surprised the BoC to the downside in the past year, particularly in
the second half of 2012. Governor Carney (BoE-bound this summer) & Co
yesterday indicated that the Canadian economy will not be up to full capacity
until the second half of next year, which is a major delay compared to the
previous ‘late 2013’ projection. Combined with subdued inflation and ongoing concerns
over household imbalances, this has led the BoC to communicate that a rate hike
is by no means imminent. It estimates a rate hike at the end of this year but
our bet is that it will come a later than that.
The loonie has taken a hit as a result of the BoC’s change
of position. GBP/CAD climbed by more than a cent and a half up to 1.5850, where
it currently trades. Meanwhile CAD/USD dipped by a cent to a level just below parity,
which represents a two-month low. This is a bit of a knock to the loonie but we
do expect the currency to outperform GBP in the coming months, with another
move down to 1.55 very much on the cards.
Richard Driver
Currency Analyst
Caxton FX
