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BoC’s Poloz justifies weak dollar, has no inclination to hike

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 7, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - Bank of Canada Governor Stephen Poloz in his speech at Ottawa today asked Canadians to get used to a cheap dollar. “Movements in exchange rates are helping economies, including ours, make the adjustments that must take place,” Governor Poloz said. He thus reiterated that lower currency value will be the norm for the country as it continues to stomach the impact of falling commodity prices. Governor Poloz noted that falling commodity prices were draining $50-billion (Canadian) a year out of the economy every year. He noted that the weak Canadian dollar resulted from low commodity prices, particularly oil.

    Rate hike by the US Fed has resulted in adding further downward pressure on the loonie. Governor Poloz was noted defending the fast depreciating Canadian dollar. "It is not a coincidence that the Canadian dollar is about where it was back in 2003 and 2004," he said, "oil prices are also about where they were back then." He justified the central bank’s attempt to keep the dollar low, saying "The depreciation of our currency is a natural part of the process".

    He said an attempt to raise the value of the currency would ‘ultimately mean far more pain for Canadians’ and would also further delay adjustment of the commodity prices. It is evident from the governor’s speech that the central bank is quite content to let the Canadian dollar stay low.

    The Canadian dollar fell close to 70 cents (U.S.) this week. The idea, it seems is to promote non-energy exports to offset the loss suffered on account of falling oil price. However, cheap dollar does have a flip side. The weak Canadian dollar has raised import value of a wide range of goods. Imports have thus become more expensive for the Canadians. Governor Poloz admitted “The depreciating currency means higher prices for imported goods and services”.

    As for the inflationary pressures, governor Poloz said that it was only a temporary phenomenon. He added “Core inflation is overstating the underlying trend of inflation in the economy”.

    Also, there seems to be no inclination to hike rates, following the footsteps of the Fed in order to control inflation. The governor believes hiking rates will cause more damage to the economy. Most economists feel Canada will not hike until late 2016 or even 2017.

    ‘Divergence’ in US-Canada monetary policy

    Bank governor Stephen Poloz seems to be no hurry to catch up with the Fed. Instead he said he will "continue to run an independent monetary policy, anchored by our inflation target of two per cent."

    It has been noted earlier that US and Canada’s policy usally move in similar directions. The year 2015 however saw rise of what is popularly known as ‘divergence’. Canada slashed its interest rates twice in 2015 while the US Fed raised rates from the record low levels for the first time in a decade at its December meeting.

    The divergence, according to the governor is justified. He explained given that Canada is a net exporter of commodities, while the U.S. is a net importer, the impact on the terms of trade for the two economies has always been different. He thus suggested continuity in divergence between the monetary policies of the two countries.

    The divergence is likely to impact the Canadian dollar significantly. The loonie is noted to have lost 16 per cent of its value in 2015 because of the opposite direction opted for by the two central banks.
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