• Cut; Bank of Canada Keeps Rates on Hold

The Canadian Dollar struggled to hold its ground as the Bank of Canada struck a cautious tone for the region, and the loonie is likely to face additional headwinds over the following week as the economic docket is expected to instill a dour outlook for future growth. Demands for Canadian assets are projected to grow at a slower pace in October, while manufacturing sales are anticipated to fall 0.6% following the 2.6% advance in the previous month, and the batch of dismal data is likely to weigh on the exchange rate as the central bank scale back its pledge to gradually withdraw monetary stimulus.

As expected, the BoC kept the benchmark interest rate at 1.00%, and it seems as though we will see the central bank maintain a wait-and-see approach in 2012 as the sovereign debt crisis bears down on the global economy. Indeed, BoC Governor Mark Carney continued to highlight the slowing recovery in Canada, and warned that the economic downturn in Europe is ‘now expected to be more pronounced’ than initially expected as the EU struggle to stem the risk for contagion. Although Canada’s financial system ‘remains strong,’ Mr. Carney argued that the European debt crisis could ‘adversely affect domestic financial stability,’ and went onto say that the marked expansion in household debt ‘require continued vigilance and close co-operation among Canadian authorities’ as the region copes with a slowing recovery. In response, the central bank head reiterated that ‘there is considerable monetary policy stimulus’ in place to shield the economy, and note that the economy will now operate below full-capacity ‘well into 2013,’ which suggests that the BoC is feeling a little less downbeat compared to its last rate decision on October 25.

The recent comments by the BOC suggests that the board remains comfortable in maintaining its current policy, but the recent weakness in the loonie looks poised to gather pace in the days ahead as the USD/CAD appears to have carved out a higher low in December. In turn, we should see the dollar-loonie continue to retrace the pullback from 1.0523, and the pair may make another run at the 61.8% Fibonacci retracement from the 2007 low to the 2009 high around 1.0570-1.0600 as the exchange rate appears to be in an upward trend. - DS

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