BOC Removes “Eventually” from When to Withdraw Monetary Stimulus, CAD Gains |
“To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be withdrawn, consistent with achieving the 2 per cent inflation target. Such reduction would need to be carefully considered.”
Last meeting, the eventually phrase, used in conjunction with “carefully considered” gave the market a more dovish indication after the release, but in today’s statement, we have a more hawkish central bank, at least the way the markets see it.
Other Keys from the Statement:
Growth expectations are solid:
“Following an anticipated slowdown in growth during the second quarter due to temporary supply chain disruptions and the impact of higher energy prices on consumption, the Bank expects growth in Canada to re-accelerate in the second half of 2011. Over the projection horizon, business investment is expected to remain strong, household spending to grow more in line with disposable income, and net exports to become more supportive of growth.”
The central banks sees better household spending ahead, as incomes increase, though exports may be affected by the stronger CAD and weaker growth in the US.
The banks sees headline inflation remainign above 3%, but that core CPI would remain around 2%.
“Core inflation is now expected to remain around 2 per cent over the projection horizon. Total CPI inflation is expected to return to the 2 per cent target by the middle of 2012 as temporary factors unwind, excess supply in the economy is gradually absorbed, labour compensation growth stays modest, productivity recovers, and inflation expectations remain well-anchored.”
The central bank therefore with growth meeting policy makers expectations, and inflation well anchored, see the risk to the upside more so than the risks to the downside. That should favor a stronger CAD on upward expectations for interest rates.
The BOC will be monitoring incoming data, and will be cautious in regards to the Euro-zone sovereign debt situation, but if the data shows continued growth, then we should see the Bank of Canada extending its recent gains vs the USD.
CAD Gains Post Release
The USD/CAD reacted with a 80 pip move downward, testing its lowest levels since the beginning of May. The move in favor of the CAD however in the pair may find support at those lows near 0.9450, however if broken that opens up further declines. We have important fundamental data on tap in the form of CPI and retail sales on Friday which can give the pair further direction.
We saw an immediate move in favor of the CAD against other higher yielders, with a 60 pip move in the EUR/CAD, as well as a strong move against its commodity currency rival in the AUD/CAD which extending the gains from last week.
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