Bank of Canada Policy Announcement: What to Expect

01/19/2010 12:01 am EST

Focus: FOREX

Kathy Lien

Managing Director and Co-Founder BKForex LLC, BK Asset Management

This week, the focus is on Canada. It is a big week up north with the Bank of Canada scheduled to make a monetary policy announcement today (Tuesday, January 19). There won't be any surprises in terms of interest rates since the central bank already pledged last month to leave rates unchanged at 0.25% through June.

However, the BoC could grow more cautious, which could halt the rally in the Canadian dollar. Since the last monetary policy meeting, economic data has taken a turn for the worse. Employment unexpectedly fell by 2,600 in December, retail sales grew at a slower pace, the country's trade surplus turned into a deficit according to the latest figures, new motor vehicle sales plunged, and manufacturing activity contracted for the first time since April. Although demand for Canadian dollar-denominated assets increased significantly in November, the bulk of demand was for new US dollar bonds sold in Canada.

Yet most importantly, the Canadian government is growing concerned about the weakness of the US dollar and the strength of the loonie. The BoC previously indicated that one of the main risks for the Canadian economy is "persistent strength in the Canadian dollar that could act as a significant further drag on growth and put additional downward pressure on inflation." Unfortunately, USD/CAD has fallen 400 pips since the last monetary policy meeting and we are already seeing the negative impact that the strengthening currency is having on the economy. Deteriorating economic data and a stronger CAD could make the BoC less hawkish. The continuation in the downtrend of USD/CAD should rest in the hands of the BoC.

The following table illustrates the changes in economic data since the December monetary policy meeting. Stocks and bond yields are higher, but overall, the economy has weakened.

Click to Enlarge

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