Will the BOC become a dove?

Will the BOC become a dove?

The Bank of Canada will announce the interest rate tomorrow (March 7 at 17:00 MT time). Concerns about trade wars that appeared after Donald Trump declared imposing of import tariffs affected the Canadian economy and expectations on the future rate hikes.

The Bank of Canada (BOC) had increased the interest rate by 0.25 percentage points to 1.25% in January 2018. So experts do not expect another hike tomorrow. Two rate hikes in a row are always unlikely. However, there are doubts about the number of other rises and the mood of a Governor’s speech.

Last time when the BOC raised the rate, it was quite concerned about trade developments. The NAFTA’s negotiations were creating uncertainties.

Nowadays, the situation became worse as the US is planning to enact the tariffs on steel and aluminum. Such measure is damaging for the Canadian economy, as Canada exports almost 90% of its steel to the US taking the biggest share in the US overall steel import. The news about tariffs made the loonie to suffer. The Canadian dollar had the worst week in a year. Canada said that it will retaliate if these tariffs are implemented against it. So the trade war between countries will have the damaging effect on the Canadian economy. (More about trade wars and their impact on the economies you can read here).

Another issue of uncertainty is economic data that quite softened after the last rate hike. The economic growth showed smaller figures that projected in the final quarter of 2017 because consumer spending declined. Net jobs showed its largest monthly decrease since 2009. Retail sales were lower as well. A federal budget kept the fiscal deficit steady.

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Source: TRADING ECONOMICS

Based on the economic data’s decline and the uncertainties about the US tariffs, experts are changing their predictions on the future rate hikes. The world’s biggest money manager BlackRock cut the forecast from two to one this year.

Not all experts agree with this forecast. They still expect two rate hikes, however, if before odds that the BOC will increase the interest rate on May 30 were at about 80%, now they declined to 50%. Analysts say that even if the BOC raises the interest rate two times this year, its statement will not be hawkish anymore. More likely, the Governor Mr. Poloz will be cautious in his words.

If we look at the chart, we can see that the loonie could strengthen before the BOC’s statement.  However, without the support of the central bank, the Canadian dollar will suffer again.

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If the USD/CAD pair breaks the resistance at 1.30, it will mean the great depreciation of the loonie. As we can see the pair has already broken the 50.0 Fibonacci retracements and went further. It creates worries for the Canadian dollar as the area above 50.0 is not normal for the currency’s movement. The next support lies at 1.28, so if the BOC finds opportunities to support the currency, the loonie has good chances to recover. 

Making a conclusion, we can say that the loonie is under the risk now. The decline of the economic data, risks of the US tariffs put the BOC’s policy under the pressure. If the Bank of Canada is not able to hold the tightening monetary policy and increase the interest rates at least two times this year, the loonie will continue to depreciate.

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