Lee Hardman, Currency Analyst at MUFG, suggests that as the Fed is moving closer to resuming rate hikes by the end of the year, the Bank of Canada signalled yesterday that it was “actively” considering providing additional policy stimulus.
“The widening policy divergence between the Fed and BoC should help to lift USD/CAD in the near-term. BoC Governor Poloz stated that it was only concerns over financial stability risks and potential support coming through from looser fiscal policy which prevented the BoC from lowering rates further yesterday. The case for additional policy stimulus was strengthened by the downgrade to the BoC’s growth and inflation outlook. As a result of the weaker growth outlook, the BoC pushed back the timing of when it expects the Canadian economy to reach full capacity until the middle of 2018 from the end of 2017.
The BoC has clearly signalled that it now has little tolerance for any further downside surprises to their outlook for the Canadian economy. The BoC is already considering taking policy action to speed up the economy’s return to full capacity. Even if the BoC refrains from another rate cut, the BoC is unlikely to consider tightening policy until 2018. The ongoing rebound in the price of oil is the main positive factor for the Canadian economy and is helping to counter balance downward pressure on the Canadian dollar from the BoC’s more dovish policy stance.”