Bank of Canada Monetary Policy Preview for January 2015

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Bank of Canada

The Bank of Canada meets later today during the US trading session. Between the BoJ and the ECB, today’s BoC event has been sidelined and rightly so. The BoC’s policy has been relatively stable somewhat compared to their peers across other major economies. This stand is likely to be reiterated by the fact that Canada’s Central Bank will be keeping its interest rates intact.

However, for the few that do follow today’s events, the main focus will be statement’s views in regards to inflation and CPI outlook. Economists are currently looking at a 20% probability of a rate cut in 2015 by the BoC, likely to take the interest rates down to a possible 0.75% from the current 1% interest rate, which has been left unchanged since 2010. While it is too early to take a call on this, considering that Canada stands to gain on the US Federal Reserve’s rate hike and the growing US economy, the focus therefore would be on the bank’s outlook for the Canadian economy.

GDP revisions could likely see a downward revision from the current levels just a few points above 2%. Inflation expectations could also see a downward revision, in line with the major central bank’s cutting their inflation expectations. Some economists expect the Canadian GDP to slow down by as much as 0.5% in 2015, a major downward revision from 2.4% in 2014.

Falling Crude oil prices have impacted Canada amongst the major economies and the BoC is likely to address this aspect as well. The lower crude oil prices have affected the Canadian economy, which relies on the more expensive methods of the Canadian Oil sands extraction. Few months ago, there were news reports of layoffs from Canadian oil firms in light of the declining fuel prices.

Economic data from the country in recent months hasn’t been cheerful to say the least. Manufacturing sales which was released yesterday saw a second consecutive decline falling below estimates which were already dovish. Unemployment rate has been firmly anchored near the 6.6% level and has been within a range of 7.2% (Jan 2014) and 6.5% (Nov 2014).

The USDCAD has been trading consistently above parity and gets seemingly closer to break above the C$1.21 handle. The next major long term technical resistance comes in at 1.27 and if the BoC does introduce a rate cut sometime this year, the USDCAD could potentially reach the highs of 1.27 levels, last seen pre-2009.

Post BoC, later this week, Canada’s CPI data is on the tap, with consensus expecting to see the CPI m/m decline a point lower to -0.3% on the core and -0.5% on headline. Earlier today, the Canadian dollar was the weaker currency (along with the Kiwi and Aussie dollar) against most of its peers and declined dramatically especially on a stronger Yen as the Bank of Japan refrained from introducing any further upside surprises this time around. The weakness in the commodity risk currencies is showing the trend of a “risk off” mode ahead of the ECB’s decision tomorrow.

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