Canadian Dollar Lower Ahead of Bank of Canada Decision
Alfonso Esparza | Sep 04, 2019 09:26
The Canadian dollar was trading at 1.3331 on Tuesday ahead of the rate decision by the Bank of Canada (BoC) on Wednesday at 10 a.m. The market is divided on what Governor Stephen Poloz will decide for the Canadian benchmark interest rate. A rate cut is in the cards this year, following the lead by the U.S. Federal Reserve to lower rates but it could come later in 2019. The BoC has more room to manoeuvre and so far, this year can afford to be patient, but as recession fears rise and the prolonged trade war between the U.S. and China continues to have a negative effect on global growth the central bank could lose that buffer.
The economy of the United Starts has been mixed and is still moving forward despite losing some of its momentum to the trade war with China. Recession fears might have been overblown four weeks ago, but as the dispute drags on with no end in sight there is more evidence of the impact it is having on both sides. If the bank does cut, 25 basis points is the likely option leaving the benchmark rate at 1.50 per cent and putting downward pressure on the loonie as the rate differential with the Fed funds rate is reduced.
The U.S. Federal Reserve hiked the benchmark rate four times in 2018 but has now gone a full 180 degrees and cut rates in July. The White House keeps pressuring for even lower rates, but the central bank has been neutral on its statements. There could be two rate cuts this year, but they could be linked to reaching a trade deal with China or not.
The market has now priced in two rate cuts this year, but the central bank could not oblige making the U.S. dollar rise given the interest rate differential it holds against other major economies such as Europe and Japan.
The Fed is caught between a rock and a hard place as the White House and the market are pushing for lower rates, but economic fundamentals do not validate a decisive rate move at this stage. Central banks have an issue with being proactive and are especially bad at offsetting the effects of trade disputes with monetary policy.
The U.S. is not near a recession but could fall into one if consumer confidence starts deteriorating. Economic indicators still show a healthy economy, and especially if compared to other major economies such as Germany and Japan.
Gold has been the preferred safe haven in times of uncertainty and with the ongoing trade war as well as Brexit, European politics and the situation in Argentina, the yellow metal is near the $1,550 price level.
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