The Canadian Dollar was lower this week as the Bank of Canada struck a dovish tone at its first rates meeting of the new year. While the BOC kept rates on hold as was expected, it was the downgrading of its growth outlook for 2019, along with more cautious forward guidance, that poured cold water on CAD.
This marks the second consecutive meeting at which the BOC has kept rates on hold and highlights the bank’s growing concern over the domestic and external outlook.
In the statement released alongside the rate decision, the BOC struck a noticeably more cautious tone. In October 2018, having raised rates for the fifth time since the middle of 2017, the BOC highlighted the necessity of further rate hikes. Now, the bank is clearly emphasizing its intention to remain on hold while it monitors certain developments.
While the BOC reaffirmed its view that the next move in rates will be higher, it said that the pace of further rate hikes “will depend on how the outlook evolves, with a particular focus on developments in oil markets and the Canadian housing market.”
Collapse in Oil Prices Creating Difficulty
A major driver of the change in the bank’s outlook has been the dramatic collapse in oil prices which have come off by around 40% since the 208 highs.
Referring specifically to the sell-off in oil, Canada’s chief export, the BOC said:
“The drop in global oil prices has a material impact on the Canadian outlook, resulting in lower terms of trade and national income.”
The bank explained the further issues around the sell-off in oil saying:
“While price differentials have narrowed in recent weeks following announced mandatory production cuts in Alberta, investment in Canada’s oil sector is projected to weaken further.”
BOC Highlights Weak Household Consumption
However, it isn’t just the energy sector which is causing the BOC problems. The bank also noted weakness in housing prices and household consumption. On these issues, the BOC said:
“Consumption spending and housing investment have been weaker than expected as housing markets adjust to municipal and provincial measures, changes to mortgage guidelines, and higher interest rates… “Household spending will be dampened further by slow growth in oil-producing provinces.”
Bank Not Just Focused on Domestic Issues
Domestic hurdles are not the only risk factors on the bank’s radar. Commenting on the external landscape the BOC stated:
“The global economic expansion continues to moderate, with growth forecast to slow to 3.4 percent in 2019 from 3.7 percent in 2018.”
Commenting on the US specifically, the Bank said while growth is currently still “solid,” it will likely slow “to a more sustainable pace” in 2019. However, the BOC also mentioned, “there are increasing signs that the US-China trade conflict is weighing on global demand and commodity prices.”
After breaking out of the falling wedge pattern that framed price action over much of 2018, EURCAD rallied to highs of mid 1.56s before retracing lower. The correction lower recently found support at a retest of the 50% retracement from the 2018 lows. While above here, the focus remains on further upside with an eventual resumption of the bullish impulse leg as the next favored move.
In the bank’s latest economic outlook, issued yesterday, the BOC revised its 2019 GDP forecast lower to 1.7%, down from the prior forecast of 2.1%.