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CAD: Weighing rate differential - Rabobank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 18, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, suggests that the Canadian economy continues to adjust to the decline in its terms of trade resulting from weak oil prices, the Bank of Canada judged at its policy meeting on December 2 that “the current stance of monetary policy is appropriate”.

    Key Quotes

    “Currently the BoC is forecasting that growth with moderate in the final quarter of this year to an annualised rate of 1.5% and accelerate to an above potential 2.0% in 2016. Although private demand has been less robust that the Bank expected, strength in the US economy combined with the weaker CAD should support the outlook. While the weaker exchange rate is boosting exports in the non-resource sector, quite clearing the weakness of oil prices continues to take its toll on the energy sector.”

    “Clearly the impact of existing measures has failed to have the desired effect. The Bank report that “in terms of household debt, income growth hasn’t kept pace with increases in borrowing, since mortgage growth continues to rise”. Although Governor Poloz has defended this year’s rate cuts by reporting that the benefits have outweighed the costs, the implication is that the Bank would be very reluctant to reduce interest rates again this cycle.”

    “This factor likely contributed to the Bank’s decisions to publish a range of other policy tools. While the BoC may not be preparing to loosen policy again this cycle, the fact that the Fed are expected to today start tightening suggests that interest rate differentials should weigh on the CAD vs, the USD. Additionally, the continued weakness of commodity and the correlation between the CAD and the oil price suggests that the CAD is set to remain on the back foot. We see USD/CAD at 1.38 on a 1 to 3 mth view.”
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