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BoC keeps overnight rate at 1.75% and CAD slumps to 4-month low
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BoC keeps overnight rate at 1.75% and CAD slumps to 4-month low

Wesley McDonald Project Finance & Infrastructure May 2019

The Bank of Canada announced its decision to hold rates at 1.75%, signalling confidence that it believes the economy is rebounding in line with projections. However, the statement remained cautious, highlighting increasing global trade risks and “heightening uncertainty about economic prospects.” This is especially important in light of the potential impact that the ongoing trade war between the US and China could have on the Canadian economy. Given Canada’s current account deficit, the economy is vulnerable to a global slowdown of capital or trade, especially if the slowdown comes as a result of protectionist policies from its two largest trading partners, the US and China.

Despite trade tensions between Canada and the US cooling since the US announced it would lift tariffs on steel and aluminium, the USMCA still remains unratified. Canada’s own troubles with China also remain, as Beijing has reacted to the arrest of Huawei CFO Meng Wanzhou with retaliatory arrests of Canadian citizens in China and the banning of shipments to China from two major Canadian Canola Oil producers. A meeting today between US Vice President Mike Pence and Prime Minister Justin Trudeau will be crucial for Canada to determine exactly where they stand in relation to the trade war between the US and China.

Markets reacted to the neutral announcement with renewed uncertainty about the ability of Canada’s trade dependent economy to pick up steam amid global uncertainty and unstable oil markets. Despite Poloz’s recent indications prior to the announcement that interest rates would rise once “headwinds dissipate,” the market is anticipating an almost 50 per cent chance of a rate cut by October. As a result, USD/CAD traded as low as 1.3542 following the announcement, a four month low for CAD against USD. The downward movement of CAD followed pressure on the currency as China made indirect threats regarding the exports of rare minerals to the US, triggering demand for safe-haven currencies. The BoC is currently caught between strong domestic economic data and continuing global uncertainty, especially regarding trade and this presents a situation where well-structured hedging should be considered to mitigate potential market volatility.

To discuss any of the issues raised in this article, please contact Wesley McDonald or call on +1 647 714 8370.

 

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