Canadian Dollar Strengthens Despite Revised Outlook

Daily Analysis - 14/07/2016

Bank of Canada Leaves Monetary Policy Unchanged With Inflation Target In Reach

The latest Monetary Policy Report delivered by the Bank of Canada showed the economy closer to reaching the Bank’s inflation target even with a number of internal and external headwinds impacting the economy. Considering the uneven growth, the Central Bank opted to revise forecasts for growth lower amid the heightened levels of uncertainty.

Bank of Canada Keeps Rates On Hold

In a widely anticipated move, the Bank of Canada opted to leave rates at 0.50% as the inflation picture grows more assured. The risks of lowering rates further raise the risk of problems with taming inflation, especially at a point when the recovery in oil prices has helped temper the weakness in the Canadian dollar. According to current forecasts, inflation is expected to reach the 2.00% target in 2017, however, growth is expected to be weaker going forward. The Central Bank revised projections for GDP expansion downwards to 1.30% for 2016, 2.20% in 2017, and 2018 growth of 2.10%. The main concern raised by the latest statement from the Central Bank was the troublesome conditions in certain high profile real estate markets including Vancouver and Toronto. The reaction in the Canadian dollar was largely positive following the announcement, with the USDCAD pair falling back below 1.3000 to trend near 1.2927.

Oil Rebounds After Sliding Inventories Send Prices Higher

After falling from nearly $46.50 per barrel to below $45.00 per barrel, West Texas Intermediate crude oil futures are once again on the rise following another inventory drawdown according the US Energy Information Administration. The Department of Energy report saw crude stockpiles drop by -2.546 million barrels last week, however, the real problem lies in the build in distillates which climbed by 4.058 million barrels of energy equivalent. This is evidence that refinery run rates are especially high, mainly due to low stocking costs and higher output capacity. More problematic was climbing gasoline inventories which rose by 1.213 million barrels last week. The thesis that cheaper gasoline prices at the pump would generate higher demand during the summer driving season has yet to come to fruition, keeping the energy glut alive in the meantime. WTI managed to claw back from earlier losses, trading at $45.37 per barrel.

Australian Unemployment Rises Marginally

As was forecast by economists, the unemployment rate in Australia rose from 5.70% to 5.80% in June, climbing to the highest rate in 4-months, echoing concerns about the outlook for the nation. Although 7,900 jobs were added during the latest measuring period, the number of unemployed individuals rose by 9,900. The latest figures deal another blow to the Reserve Bank of Australia which has been accommodating the economy through lower interest rates. Despite interest rates which have fallen to 1.75%, there is growing speculation that the Central Bank will have to do more with unemployment on the rise once more and inflation printing well below the 2.00-3.00% targeted by policymakers. Forecasts are currently estimating rates will drop by an additional 25 basis points by the end of the year to 1.50% as the Central Bank works to spur growth, inflation, and tackle the perception of an overvalued local currency.

Euro Industrial Production Slips Further

Aside from having to deal with the fallout from the British referendum results, conditions in the Euro Area are not improving as quickly as policymakers would prefer as industrial production expansion continues to decelerate on an annualized basis following poor monthly performance. Statistics released yesterday by Eurostat showed that industrial production fell by -1.20% in May versus expansion of 1.40% during April. On an annualized basis, headline industrial production increased at a more sluggish 0.50% compared to the 2.20% reported in April. As the ECB struggles with asset purchases considering many sovereign bonds are trading with negative yields and the available supply is shrinking rapidly, there are questions as to whether monetary policy will be enough to spur growth and inflation in the monetary union. The EURUSD pair climbed moderately following the announcement, rising back above the 1.1100 level.