Hawkish Tone Strengthened The Canadian Dollar
MAY 3, 2021
Bank of Canada first to taper QE in 2021.
During the monetary policy meeting last Wednesday, the Bank of Canada (BoC) held its overnight rate unchanged at 0.25% and adjusted its quantitative easing programme. Being the first central bank this year to carry out a tapering, the BoC has reduced its weekly net purchases of government bonds from $4 billion to $3 billion, claiming that progress has been made in the economic recovery in Canada. In fact, Canada’s growth during the first quarter of 2021 has surpassed the central bank’s forecast. Possibly the most hawkish part of the rate statement is that the central bank now expects its 2% inflation target to be “sustainably achieved” and economic slack absorbed during the second half of 2022. What this implies is that the central bank may be hiking its overnight rate during the second half of 2022. The Canadian dollar strengthened across the board as a result of the central bank’s hawkishness.
Nonetheless, the central bank also warned that some parts of Canada are still undergoing the third wave of the pandemic. With the new variant of virus that is seemingly more contagious, the BoC emphasized that a full recovery will still be highly dependent on the rate of the vaccination programme and how the pandemic plays out.
How is the Canadian economy doing right now?
Statistics Canada delivered a surprise jobs report for March when it reported that 303,000 jobs were added, tripling the market’s expectation of a 101,000 jobs increment. This has placed Canadian employment to be within 1.5% of its pre-COVID level back in last February. Furthermore, unemployment rate continued to fall from 8.2% to 7.5%, the lowest level since last February. The Ivey PMI reported a ten-year high reading of 72.9, indicating that business activities have been expanding at the fastest pace in the past ten years. Inflation continued to rise albeit at the same pace as the previous month.
The retail sales and GDP data for February are due for release this week. Consumer spending is expected to rebound strongly from the previous month’s decline while the economy is expected to grow at a slightly slower pace. Nevertheless, the BoC has revised its GDP forecast for 2021 from the previous above zero to the current 6.5%, indicating the resiliency of the Canadian economy.
Rise in oil prices boosted the Canadian dollar.
Another major factor that led to the recent strengthening of the Canadian dollar is the rise in oil prices. During the OPEC-JMMC meeting In January, Saudi Arabia volunteered to cut its oil production by 1 million barrels-per-day (bpd) for February and March, leading to the spike in oil prices due to a lower supply of oil. Then in March’s meeting, to the surprise of the market, Saudi Arabia extended its 1 million bpd oil production cut into April when many were expecting the kingdom to end its voluntary cut. Furthermore, most of the OPEC+ members agreed to maintain status quo in their production level as opposed to the expectation of an increase of up to 1.3 million bpd starting from April. The recovery in oil prices to the pre-pandemic level has boosted the Canadian dollar.
Moving forward, we can expect the Canadian economic data that will be released in May to indicate a slight hold back in growth due to the recent lockdown imposed to curb the spread of the virus. This may lead to a pullback in the Canadian dollar but should not hinder it from further strengthening.
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