Bank of Canada Predicts Strengthened Growth

The Bank of Canada (BOC) published their monetary policy report on Wednesday. They expect Europe to continue recovery from recession through the rest of 2012 but recognize that risks remain. As well, they project the US will continue to make economic improvements as shown in an improving labor market, confidence indexes, household deleveraging and emerging fiscal consolidation. Overall, the bank forecasts the global economy will expand around 3.2% in 2012 with continuation of easing in macroeconomic policies. On the other hand, improvements in the global economy, alongside supply disruptions and geopolitical risks have caused commodity prices in Canada to remain high, according to the bank. More specifically, the international price of oil has risen significantly and if maintained it could weaken the economic improvement rate. At present, Canada’s economy is making improvements at a stronger momentum than the bank initially projected. Furthermore, they expect Canada’s economy will expand 2.4% by the end of this and next year, more than its previous projection of 2.0% set earlier in the year. In 2014 the bank forecasts the country’s expansion will then moderate to 2.2%. 

The bank predicts domestic demand will be the driving factor of economic growth over the foreseeable future partly due to increased household spending. As well, strengthened business investment is expected to continue strong. The bank elected to continue the benchmark lending rate at 1.0% on Tuesday and forecasts inflation will be around 2.0% over the balance of the projected horizon. The three largest factors that could impose higher inflation include higher-than-expected oil prices, stronger-than-expected US expansion, and an increased pace in Canadian household spending.

The USDCAD consolidated today after the 100 pip drop yesterday after the rate announcement. While markets favor Canadian Dollar bulls, the momentum was not strong enough for the USDCAD to break to stay below current support at 0.9893. The Canadian dollar benefits from rise in prices of Oil and we expect the pair to trade in a range between 0.9893 – 1.0001 as long as Oil stays below $110 a barrel. 

Eugene Ross, Analyst

Admiral Markets

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