For the fifth consecutive monetary policy meeting, the Bank of
Canada left interest rates unchanged at 1 percent. Even though the
central bank grew more optimistic about the outlook for Canada,
even going so far as to raise its 2011 GDP forecast to 2.9 from 2.4
percent, the strong Canadian dollar has made them reluctant to
raise interest rates. With one Canadian dollar worth more than one
U.S. dollar, the central bank's greatest concern is that exports to
the U.S. will continue to suffer. This morning, Canada reported a
smaller trade surplus and a 4.9 percent decline in exports. Since
the middle of 2010, the Canadian dollar has been in a relentless
rally that has taken it 3.5 year highs against the U.S. dollar. As
a result of the currency's persistent strength, the BoC is worried
about "greater headwinds." Going into the BoC meeting, currency
traders were looking for hawkish comments from the central bank and
even though they delivered, their clear reluctance to raise
interest rates has sent the CAD tumbling.
Outside of their concern about CAD strength, the comments from
the Bank of Canada were mostly positive. The BoC believes that the
global recovery has improved and there are signs of solidifying
U.S. economic growth. They also believe that the Canadian economy
will reach potential 6 months earlier than previously anticipated
which is a very positive assessment for Canada. Although they
repeated that further rate increases need to be carefully
considered, they also said the economy now has "material excess
supply" which is a step towards tighter monetary policy. We still
believe the BoC is on track to raise interest rates in Q3 and that
USDCAD will have a very tough time recapturing parity this
year.
Although this morning's economic reports showed a slowdown in
Canadian trade activity in the month of February, overall the
Canadian economy is still performing well thanks to higher
commodity prices and continued global recovery. The country's trade
surplus narrowed to C$33 million from C$382 million. The 4.9
percent decline in exports which was caused mostly by weaker demand
for autos was expected given the strength of the Canadian dollar
but the 4 percent decline in imports was surprising and due largely
to softer energy and auto demand. The housing market on the other
hand is showing new signs of life with the price of new homes
rising 0.4 percent in February.
Meanwhile the U.S. reported a narrower trade deficit but a
downward revision to the January number and a larger print in
February made the overall report dollar bearish. Exports rose 2.7
percent while imports increased by 5.2 percent, a sign of continued
economic recovery. Although higher crude prices contributed to the
rise in imports, the pace of growth slowed 50 percent from the
previous month. The most substantial gains were seen in imports of
semiconductors, computers, telecom equipment, cars and apparel
which suggests that an improvement in core demand. Imports from
China continued to grow while exports slowed. Higher food and
energy costs also drove import prices up 2.7 percent.