Posted on April - 20 - 2010
Bank of Canada Drops Conditional Commitment, Loonie Soars
In today’s statement following the conclusion of its interest rate decision meeting the Bank of Canada announced that it will maintain its overnight rate target at 0.25%, but that it would remove its conditional commitment to keep rates at that level until the end of the 2nd quarter. Dropping that commitment will fuel speculation that the Bank is ready to begin tightening rates and may do so in its next meeting on June 1st.
The Bank increased its projections for growth, now saying that the economy will grow by 3.7% in 2010 as “policy stimulus resulted in more expenditure being brought forward in late 2009 and early 2010 than expected.” Canada’s housing sector is also very strong and with near term global growth stronger the outlook for the Canada’ economic recovery “is proceeding more rapidly than the Bank projected in its January Monetary Policy Report… The Bank expects the economy to return to full capacity in the second quarter of 2011.”
From the Statement:” In response to the sharp, synchronous global recession, the Bank lowered its target rate rapidly over the course of 2008 and early 2009 to its lowest possible level. With its conditional commitment introduced in April 2009, the Bank also provided exceptional guidance on the likely path of its target rate. This unconventional policy provided considerable additional stimulus during a period of very weak economic conditions and major downside risks to the global and Canadian economies. With recent improvements in the economic outlook, the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus. The extent and timing will depend on the outlook for economic activity and inflation, and will be consistent with achieving the 2 per cent inflation target.
The USD/CAD was trading around 1.0112 prior to the announcement and slid down to below parity in the next 30 minutes.
In a slightly longer timeframe, the rise in the pair move we saw in the past 4 sessions, from 0.9950 to 1.0214, was cut down sharply and we again test the levels below parity. We shall see if there is follow-through to the initial knee-jerk reaction during the rest of today’s trading. The change of stance by the BOC is the type of fundamental news the Canadian Dollar needed in order to attempt a sustained move below parity.
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