Canadian Dollar Selling Reawakens After The Bank Of Canada Responds To Trump Policies

“Uncertainty about the global outlook is undiminished, particularly with respect to policies in the United States.” – Bank of Canada press release, “Bank of Canada maintains overnight rate target at 1/2 per cent”, January 18, 2017

I start with this quote from the Bank of Canada because it stands in stark contrast to global financial markets, especially in the U.S., that have behaved with a good deal of certainty. This stance forms the basis of the abundance of caution expressed throughout the Bank of Canada’s decision to hold interest rates constant at its last pronouncement on monetary policy. Amid the caution, the Bank of Canada slightly increased its growth assumptions for the U.S. by 0.5% through 2018 because of an anticipated mix of corporate and personal tax cuts. Forecasts for Canada stayed “largely unchanged” because “in contrast to the United States, Canada’s economy continues to operate with material excess capacity.” The Bank of Canada boosted its Canada growth rate just 0.1% through 2018.

The Bank summarized Canada’s growth prospects as follows…

“While employment growth has remained firm, indicators still point to significant slack in the labour market. The resource sector’s adjustment to past commodity price declines appears to be largely complete, but negative wealth and income effects will persist. Meanwhile, the Canadian dollar has strengthened along with the US dollar against other currencies, exacerbating ongoing competitiveness challenges and muting the outlook for exports. Consumption is expected to remain solid, while residential investment will be tempered by previously announced changes to housing finance rules and by mortgage rates that have risen in response to higher bond yields. Federal and provincial fiscal measures are still expected to support growth in 2017.”

Bank of Canada governor Stephen S. Poloz provided more background on the process of assessment in the opening statement to the January Monetary Policy Report. I was most interested in the Bank’s views on the impact of potential changes in U.S. economic policies. Poloz confirmed that the Bank is worried about U.S. President Trump’s trade posturing, but specifics remain elusive and thus not yet calculable.