Bank of Canada Retains Calm Tone, Continues QE Program

Following the Bank of Canada meeting, the loonie made a tiny recovery. Policymakers kept the overnight rate at 0.25 percent and QE purchases at CAD 2 billion per week, as expected. Despite poor GDP numbers in 2Q21 and July, they remained cautiously optimistic about the medium-term economic prospects.

The Bank of Canada (BoC) decided to keep the overnight rate at 0.25 percent while keeping the quantitative easing (QE) program at $2 billion in weekly asset purchases.

The Bank maintained that the interest rate would continue at its effective lower bound until economic slack is absorbed and the 2% inflation objective is sustained, which it expects to happen in the second half of 2022, according to its July projection.

In response to the recent dismal second-quarter GDP numbers, the Bank stated that while overall output fell by around 1%, domestic demand increased by more than 3%. Furthermore, employment increased in June and July. As a result, the Bank expects the recovery to pick up steam in the second half of the year, however, the Delta variant and supply chain delays may dampen growth in the fourth quarter.

Bank of Canada Notes Supply Chain Concerns: USDCAD Suffers Setback

The Bank of Canada’s monetary policy statement confirmed the dangers to the global economy, particularly for export-dependent, growth-sensitive currencies like the Canadian currency, following a string of negative data over the last month. On the release, the loonie extended its selloff from earlier in the week, with USD/CAD gaining by approximately 100 pips for the second day in a row. With little in the way of historical opposition until closer to 1.2900, the North American pairing might certainly have additional room to surge in the immediate term. Any near-term falls, meanwhile, could find support in the mid-1.2500s, where the 50- and 100-day EMAs meet.

The Bank of Canada’s monetary policy statement reaffirmed the global economy’s concerns, particularly for export-dependent, growth-sensitive currencies such as the Canadian dollar. The Bank of Canada (BOC) reduced its weekly asset purchases from CAD 2 billion to $3 billion in July, taking a tiny step toward “normalizing” monetary policy. Since then, the Canadian economy has had a series of setbacks.

Last week’s Q2 GDP data came in at -1.1 percent annualized, well below the predicted +2.5 percent, while the preliminary estimate for July GDP came in at -0.4 percent. Meanwhile, COVID’s delta variation is spreading across the country and to its key trading partners, casting a cloud over the country’s economic prospects in the short term. Simultaneously, polls for the country’s federal election, which will take place in two weeks, have narrowed substantially, adding a layer of political uncertainty to corporate and consumer expectations.