CAD Drops as Bank of Canada Flags Concerns Over Trade Wars

Canadian dollar nears 8-month high ahead of Bank of Canada rate decision

Canadian dollar nears 8-month high ahead of Bank of Canada rate decision

The Bank of Canada is citing "ongoing trade tensions" as a reason why the interest rate will hold steady at 1.75%. They left the benchmark interest rate unchanged at 1.75 per cent, as expected, but said recent economic strength is deceptive, payback for a lousy winter that caused economic growth to almost stall.

The BoC's forecast for economic growth in 2020 was cut to 1.9 per cent from 2.1 per cent.

Canada's key interest rate has remained steady at 1.75 per cent since October 2018.

"The Bank of Canada set a pretty low bar in terms of its second-quarter growth numbers", said Royce Mendes, a senior economist at CIBC Capital Markets.

Bank of Canada Governor Stephen Poloz released the bank's latest interest rate decision Wednesday morning, as well as a monetary policy report outlining the bank's detailed view of the economy in Canada and the world.

The central bank's policy-makers are widely expected to hold the trend-setting rate steady as Canada exits a sharp slowdown that almost brought the economy to halt at the start of the year. It predicted growth an annual pace of 1.5 per cent for the third quarter.

The next scheduled date for announcing the overnight rate target September 4, 2019.

U.S. Federal Reserve chairman Jerome Powell signalled Wednesday that a U.S. rate cut was likely later this month due to slowing global growth and trade conflicts.

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"The bank is going to want to nudge interest rates up a little bit more, so that they have a bit of ammunition when the next downturn hits". "Taken together, the degree of accommodation being provided by the current policy rate remains appropriate".

Barclays Capital analyst John Aiken wrote recently that the "ability for the banks to grind out mid-single digit earnings growth for the year could prove challenging", and that a Bank of Canada rate-cut could hurt the outlook of lenders who are more exposed to the Canadian market. "Trade conflicts between the USA and China, in particular, are curbing manufacturing activity and business investment and pushing down commodity prices".

USD/CAD tumbled from 1.3126 to 1.3073 as of 17:40 GMT today.

China's recent trade actions on meat and canola products from Canada are expected to lower exports by 0.2 per cent, the bank said.

Global trade tensions, meanwhile, have escalated, particularly between the USA and China, forcing policy makers to mark down their projections for global growth and lower estimates for business investment and exports.

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. Traders had bet the Bank of Canada would not follow suit, helping push the Canadian dollar to near eight-month highs against the greenback.

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 US counterpart, which could push through more than one cut.

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