BoC Illuminates Economic Risks with Monetary Policy Report

ForexNewsNow | Published on October 20, 2010 at 4:58 pm

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Intraday analysis - The Canadian FlagNEW YORK (Forex News Now) – Today, the Bank of Canada held a press conference and released its latest monetary policy report covering the recent developments in the Canadian economy.

In its realtime forex announcement, the Bank of Canada stated that the Canadian economy endured the toughest quarter since the beginning of the recession, and no policy options have been taken off the table.

“At this time of transition in the global recovery, with a weaker U.S. outlook, constraints beginning to moderate growth in emerging-market economies, and domestic considerations that are expected to slow consumption and housing activity in Canada, any further reduction in monetary policy stimulus would need to be carefully considered,” the bank stated in its report.

In other words, the Canadian central bank is leaning heavily against reducing stimulus, and is still considering options like cutting interest rates – a policy option that was thought to be off the table with Canada’s recent economic success.

But in the past quarter, the Bank of Canada projected a scant 1.6% growth in the economy, compared to 2% in the second quarter and 5.6% in the first. This outlook was based primarily on internal and external factors, as explained by Mark Carney, the governor of the Bank of Canada. “There are three downside risks relating to Canada’s international competitiveness, global growth prospects, and the possibility of a more-pronounced correction in the Canadian housing market,” said Carney.

He further went on to mention the weakness of the U.S. economy as a downward influence on the Canadian economy, driven heavily by Canadian exports to America. Domestic growth in the Canadian economy is projected to reach 3%, due to a strong first quarter, and is slated to drop to just 2.3% in 2011.

The realtime forex effects of the press conference and policy report caused the Canadian dollar to fall 0.63% against the euro, to 1.4268. The loonie did manage to gain substantially on the dollar, though, moving up 1% to 1.0223. The news came as a slight surprise to some investors who have predicted continued strength in the Canadian economy.

As indicated by the rise in USD/CAD, though, it is likely that the weakness in the dollar will outweigh the disappointing report, lending downward pressure to USD/CAD. The loonie still looks vulnerable to the euro, though, and will likely see further losses against that currency.

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