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CAD: Dovish BoC Comments Halts March to Parity

Last updated 10/25/2011 9:25 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

With little in the way of fresh market moving headlines out of Europe, the focus has shifted, albeit temporary to North America. The Canadian dollar rose to a fresh 1 month high against the greenback following better than expected retail sales numbers but the gains evaporated quickly after the Bank of Canada released their monetary policy statement. According to the BoC's statement, the central bank has not been swayed by the recent improvements in Canadian and U.S. data. Retail sales may have risen 0.5 percent in August while the labor market experienced its strongest job growth since January but a grim outlook for the U.S. economy and the possibility of a brief recession in the euro area has prompted the central bank to lower its growth and inflation forecasts. 

The BoC left interest rates unchanged at 1 percent, which was in line with market expectations but what killed the loonie was the disappearance of the words "need to withdraw stimulus" from their monetary policy statement. The BoC's concern about the U.S. and Eurozone is so engrained that they opted to

send a strong message to the market that can be interpreted to mean rates will remain unchanged until the middle of 2012. The BoC may have stopped short of making any mention of easing monetary policy, keeping interest rates low and stimulus in place leaves them far more dovish than most investors had anticipated. As a result, the Canadian dollar soared against all of the major currencies. With recent improvements in Canadian and U.S. economic data along with the possibility of a resolution to the European sovereign debt crisis this week, the central bank's dovish comments caught many people by surprise. The BoC's decision to downgrade their growth and inflation outlook also suggests that a rate cut is not off the table. The BoC reduce their 2011 growth forecast from 2.8 to 2.1 percent while growth in 2012 was also downgraded from 2.6 to 1.9 percent. Total inflation is now expected to slow to 1 percent by the middle of next year. 

Unlike the Reserve Bank of Australia, who expressed optimism about growth in the region, the Bank of Canada does not have their rose tinted glasses on. One month of better than expected economic data is clearly not enough to convince the BoC that the outlook for the global economy has improved. Canada relies more heavily on U.S. demand than Chinese demand which explains why the recovery in oil prices has not led to an increased optimism. Instead, the BoC opted to focus on the continued risks that the economy faces including the prospect of weaker domestic and external demand. This is bad news for the Canadian dollar and will put a halt to the currency's march towards parity.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.