CAD Drops as Bank of Canada Flags Concerns Over Trade Wars

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"Escalation of trade conflicts remains the biggest downside risk to the global and Canadian outlooks", it said. For the sixth-straight meeting, this was said to be based upon balances among domestic economic improvements with an expanding global slowdown caused by trade conflicts. The net effect is that growth for all of 2019 will remain sluggish at 1.3 per cent - little changed from the 1.2 per cent expected in April when the Bank of Canada last released economic forecasts.

In recent months, the Bank of Canada has shown it's in no hurry to move the borrowing rate - up or down - after raising the benchmark five times between mid-2017 and last fall. It does not appear the Bank of Canada will immediately follow suit, which would create an environment that some economists said may lead to the Canadian currency strengthening to 80 cents US.

Meanwhile, Fed Chairman Jerome Powell reinforced expectations the US central bank will cut interest rates for the first time in a decade at its next monetary policy meeting later this month, saying trade uncertainties and concerns about the global outlook continued to exert pressure on the American economy.

Wilkins are now responding to questions from the press at a press conference following the Bank of Canada's decision to leave the policy unchanged at 1.75%. In light of recent encouraging data, the BoC had upgraded their Q2 GDP forecast to 1.3% from 1% citing an unwind of the temporary factors that had plagued GDP growth in the beginning of the year.

The next scheduled date for announcing the overnight rate target September 4, 2019. A rate-cut by the U.S. Federal Reserve could affect their earnings as well, as lenders have had weaker earnings growth in their home market of late supplemented by stronger showings from their U.S. and worldwide businesses.

The Bank of Canada "retained the neutral bias but (was) incrementally more dovish in terms of the whole package ... it didn't go as high on its Q2 GDP growth (forecast) as it might have at 2.3%". We are anticipating a couple of rate cuts from the Fed. Its unemployment rate fell in May to its lowest level since 1976. Eastern (1400 GMT), in which it is widely expected to hold interest rates steady at 1.75%.

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The numbers are good, but "the outlook is clouded by persistent trade tensions", the statement said.

In Canada, increased Chinese trade restrictions on canola and meat exports were estimated to reduce Canadian exports by 0.2% over the second and third quarters.

The Bank of Canada today maintained its target for the overnight rate at 1 ¾ percent.

The gap between Canada's 2-year yield and its USA counterpart narrowed by 4.4 basis points to a spread of 20.7 basis points in favour of the US bond, its smallest gap since January 2018.

Sal Guatieri, a senior economist with BMO Capital Markets, said the risks to the Bank of Canada's policies "are more even-handed" than its USA counterpart, which could push through more than one cut.

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