It seems a lot has been on the plate of the Canadian financial and economic sector with the blow by blow turn of events. The market participants are looking forward to the upcoming policy meeting report as the government joggles the concerns over the EU-CETA deal. Recent data challenge the stability of the economy in general.
Bank of Canada
On Wednesday, the Bank of Canada is set to disclose its benchmark interest rate which will be followed by a press conference. The statement of the central bank of Canada is expected to highlight the current economic conditions and the factors related to the path of the currency. During its latest monetary statement, a period of low growth for the rest of 2016 was forecasted. Thus, it will likely hold its key interest rate.
As expected, the bank will factor in the oil prices, the trade data, housing and manufacturing figures together with the inflation target. The strong trade-link of Canada with China and other countries could be part of their discussion table. ( See the article CAD Fluctuates Ahead Trade Data in FSM News)
Brittany Baumann, a macro strategist at TD Securities in Toronto agreed that the bank will push a rate cut as the greater uncertainty with regards to external demand and future business may scare them. In an interview, Braumann said, “While a rate cut this month is unlikely in our view, should incoming data beyond October confirm further deterioration in growth conditions, particularly in non-energy exports and U.S. growth, the risk of additional policy easing will grow considerably.”
During the second quarter report of the bank, the uneven growth of the economy was shown after the volatility of commodity prices and the impact brought by Alberta wildfires. Although the real GDP may increase at a rate that exceeds potential growth, the outlook remained fickle on financial conditions and the monetary rate policy decisions. (See the graph below)
Further, the inflation target could still remain at 1/2 as the bank awaits for the significant pick-up of the economy. Canada will release release the inflation and retail sales data at the end of the week. Technically, the negotiations over the total exit of Britain from the European Union still send vulnerability over the financial market (See BoE Detects Brexit Impact on Businesses at FSM News). Supporting this notion, the bank foresees inflation to be around 2 percent in 2017 as the output gap narrows. (See the graph below)
Elsewhere, the proposed free-trade agreement between Canada and the European Union struggled to materialize after the regional parliament of Wallonia moved a motion not to grant the federal government with a go signal. EU Trade Commissioner Cecilia Malmstrom explained the effort of the union to settle the issues in Belgium ahead of the attendance of Canadian Prime Minister Justin Trudeau at the EU-Canada Summit.
The Comprehensive Economic and Trade Agreement or CETA intends to brush off 98 percent of the tariffs between Canada and the European Union. In line with this, the authority of investor-state dispute-settlement will be broadened, giving an exclusive authority for the corporations to sue governments. The proposal has faced a number of criticisms which include weakening of the European consumer rights and exposure of multinational firms with tantamount of risks. In the eyes of the majority, this could the most progressive, even the highest quality, trade agreement between Europe and Canada. However, the way it looks, it goes down to the trade confidence between the union and other countries after Brexit.
The loonie remained moderately stronger against the greenback as USD/CAD lost 0.29 percent to trade at 1.3093 at the mid-session. The US dollar was challenged before the release of the U.S. inflation data, however, it sought recovery after the recorded increase of the US cost of living in five months in September. The Canadian dollar stayed on the offensive ground as the rising oil prices support the currency.
As seen in the image below, the USD made a remarkable slide against the loonie which started last week. From the peak at 1.32844, USD/CAD plunged to 1.30909 at 16:07 UTC today. The pair had a session high of 1.30911 and a session low of 1.30524 with reasonable of a high volatility as the band gets wider.
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