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BoC to cut rates? - BBH

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 19, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Guatemala) - Analysts at Brown Brothers Harriman explained that the Bank of Canada is widely expected to cut its overnight rate by 25 bp tomorrow.

    Key Quotes:

    "Unlike the ECB or the Sweden's Riksbank that are easing policy an attempt to arrest lowflation or deflationary forces, the challenge for Canada is growth. The economy has been hit with a significant terms of trade shock and the collapse of WTI and Brent has been more than duplicated by Canada's benchmarks.

    The woes of the energy producers have bled into the broader economy, and the price of oil has fallen by a quarter since the Bank of Canada last met. The economy unexpectedly contracted in September and stagnated in October, the latest monthly print. That contraction was a blow to sentiment. After the economy had contracted January through May last year, it found better footing in the June through August period. Other economic data, including surveys and credit conditions, have worsened.

    A rate cut would not be surprising. However, subjectively we see a modest chance that with the new government pursuing a more accommodative fiscal policy that the central bank bides its time. It also may not want to be seen panicking in response to the market turmoil over the last couple of weeks, which has included a 4.7% decline in the Canadian dollar, which is tantamount to some degree of easing.

    Given trade ties, it is no wonder that the Canadian dollar's performance against the US dollar drives the TWI. The Canadian dollar may snap a 12-day declining streak today. This is the longest losing streak since the end of Bretton Woods. Even now, the Canadian dollar bears have not been broken, as the greenback is a big figure off the early lows.

    Even if the Bank of Canada chose to ease policy, it might prefer to launch an asset purchase program instead of pushing the overnight rate any lower (currently at 50 bp). Governor Poloz has already suggested that he would consider an asset purchase program. Launching an asset purchase program while the policy target rate is at 50 bp is what the Bank of England did. Arguably a bond-buying program may have greater impact that a 25 bp rate cut. The takeaway from this thumbnail sketch of the BoC meeting is that there still is scope for the Bank of Canada to surprise the market."
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