CAD Analysis – 2nd of March

The Canadian dollar remains relatively neutral fundamentally after the BOC’s recent communications, however there continues to be a bearish tilt on the currency until we see further improvement in data, and stability in the crude oil market. Further declines in crude will continue to pressure the CAD, and could force the BoC to act over the coming months.

CAD Analysis

Interest Rate

Overnight Target Rate: 0.50%

Last Change: July 15, 2015 (0.75%)

Expected Future Change: On hold

Next decision: March 9

Inflation

Inflation Target: 2% (1-3%)

Period: Year ending January 31

CPI: 2.0% Prior: 1.6%

Core CPI: 2.0% Prior: 1.9%

Next Release: March 18

Employment

Period: January

Employment Change: -5,700 Expected: 5,200

Unemployment Rate: 7.2% Expected: 7.1%

Next Release: March 11

Growth

Period: November

GDP: 0.30% Expected: 0.30%

Next Release: March 1

The Bank of Canada left rates unchanged at 0.50% at the January 20 policy announcement. The consensus was marginally for a 25 bps cut, however it was expected to be a close call with analysts divided, and the OIS market pricing in just over a 50% probability. The main changes in the policy report underline a more negative near term domestic evaluation, while the global picture is not very different from the October report. Overall, the report was generally more upbeat and less dovish than was expected.

The severe depreciation of the CAD due to falls in oil means there is less urgency to cut rates, as the lower CAD will boost inflation by making CAD-denominated goods more attractive to overseas buyers. Further, it appears that the Canadian government may introduce fiscal stimulus measures in the next budget which allows the BOC to refrain from action for now.

Employment for January was relative poor, at 7.2% the unemployment rate is at its highest level since January 2014 and missing expectations that the rate would remain flat at 7.1%. Employment change data suggests that 5,700 jobs were lost in January, as opposed to market expectations of an increase of 5,200. The weakness in the headline data was largely due to part time employment which fell by 11,300, full time employment however increased by 5,600, this indicates that employment in Canada is not as bad as the headline figures suggest. The participation rate remained flat at 65.9%.

GPD for the month of November, released January 29, showed 0.3% growth for the month as was expected. Following a 0.5% contraction in September and a flat October, Canada’s economy returned to positive growth in November. The o.3% showing for November was enough to lift the annual rate from -0.2% to a positive 0.2%, marking its best performance since August 2015.

Inflation for the 12 months ending January, released February 19, saw an increase in headline CPI to 2.0% from 1.6%, above estimates for an increase to 1.7%, and the highest print since November 2014. Headline inflation was also up on the month at 0.2%, above estimates for an increase of 0.1% and a significant improvement on the prior reading of -0.5%. Core prices also exceeded market expectations with the annual rate at 2.0% vs 1.9% expected, and the month on month figure at 0.3% vs 0.2% expected. With annual inflation at 2.0%, the BoC is right on target with its goal of maintaining inflation at a rate of 1-3%.

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