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BoC: Holding its fire for now – BMO CM

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Apr 14, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    Douglas Porter, Chief Economist at BMO Capital Markets, suggests that the BoC met expectations of holding rates steady at 0.5%, but now faces a currency near 9-months highs of above 78 cents (a 15% appreciation, one of the steepest gains ever over such a stretch) and an oil price almost 50% higher.

    Key Quotes

    “As well, the Bank upgraded its GDP forecast to 1.7% this year, at least in part due to the aggressive spending in last month’s federal budget, but also due to a slightly better start to the year for underlying domestic growth — even as the global growth environment has been marked down, most notably in the U.S. economy.

    Against that backdrop of many moving parts, the Bank did its level best to sound cautious today. Their forecast for 2016 growth of 1.7% is actually a snick below our current call (of 1.8%), and their 2017 view of 2.3% growth is only slightly above ours (2.1%).

    Most of the commentary was on the dovish side, playing up the potential negatives for the outlook — the strong Q1 was due to temporary factors and could be reversed, deeper cuts to energy investment than earlier expected, non-resource exports have a weaker-than-expected profile, and oil prices are only “slightly” above January assumptions.

    Overall, the Bank suggests that all else equal, they would have downgraded their growth forecast, and only the budget stimulus prompted the upgrade. That view is highly debatable, to say the least. With the modest upgrade to growth (again, simply from the budget measures), the Bank now sees the output gap potentially closing a bit earlier than end-2017 (now it’s H2 2017).

    And, despite all the caution, they do note that “it does appear that the positive forces…are starting to outweigh those that are negative”. With no point-blank statements to the contrary, the Canadian dollar responded to this mixed bag with a slight strengthening.”

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