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Canada has been a predominant feature in financial news in the recent few months, with many discussions centered around the NAFTA and \u2018new NAFTA\u2019 agreement, the USMCA trade deal. But despite being such a significant story, it has arguably been overshadowed by the big moves in equity markets, Brexit negotiation drama and the trouble in emerging markets, i.e., Turkey, Brazil, and even Italy\u2019s budget woes.<\/p>\n
So with the Canadian central bank, BoC, expectedly hiking rates a by 25 basis points on Wednesday 24th October, we decided to give Canada its time in the limelight it deserves and take a look at the Canadian economy. For more information on the BoC rate decision, take a look at our Analyst Klavs\u2019 article right here – > The Bank of Canada Rate Decision.<\/a><\/p>\n USDCAD Chart – BoC Tax Hike causes 100pip drop before trend continues<\/em><\/p>\n Perhaps the best place to start would be to address the most recent price swings in the Canadian Dollar and some of the driving forces behind it. In the chart above, we saw a 100pip push lower in the USDCAD (USD weakening, CAD strengthening) on the back of the BoC\u2019s decision to hike rates by a further 25 basis points to 1.75%. Now despite the highly anticipated nature of this announcement, it\u2019s the overtly hawkish comments from the executive committee members that perpetuated the move lower in the pair.<\/p>\n So what was said and what does it mean for Canada going forward? Let\u2019s begin with rates as that was the initial stimulus in the move. BoC\u2019s Wilkins, the Senior Deputy Governor, stated that \u201cPolicy Rate will need to rise to a neutral stance to achieve inflation target\u201d<\/em> that the BoC \u201cDon\u2019t have a preordained rate path\u201d<\/em> and that the \u201cpace of rate hikes is dependent on the inflation outlook.\u201d<\/em><\/p>\n In short, this translates to the stance that most Central banks seem to be adopting and that is an accommodative and data dependent bias. Meaning that while their long-term goal remains the same, i.e., raising the rate to preserve the value of money by keeping inflation low, stable and predictable, the timing with which they are willing to make changes is flexible and the comments from both Wilkins as Governor Poloz support this.<\/p>\n Poloz went on to state that the removal of the word \u2018Gradual\u2019 from monetary policy forward guidance \u201cPermits us to raise rates at a faster or slower pace depending on developments.\u201d <\/em>This statement helped to perpetuate the move higher in the Canadian Dollar because it demonstrated that Canada\u2019s government is taking the action it needs to maintain its mandate and not blindly sticking to a set term of rate hikes regardless of momentary data blips.<\/p>\n Canadian Dollar Crosses Overlay – Shows Canadian Strength across the board during comments<\/em><\/p>\n The next aspect we\u2019ll take a look at is the elephant in the room, the United States-Mexico-Canada Agreement (USMCA). Our analyst Deepta takes an extensive look at USMCA here – USMCA – NAFTA 2.0<\/a> \u2013 and what it means for Canada, so what I want to focus on is BoC\u2019s Wilkins\u2019 comments. She states that the Canadian \u201cEconomy is becoming more resilient.\u201d<\/em> And that \u201cUSMCA reduces uncertainty,\u201d<\/em> and that fact alone is good news, Governor Poloz does also state the caveat that \u201cTensions between US & China could hit Canadian export growth.\u201d<\/em><\/p>\n Since the comments, the USD\/CAD rate has seen quite a bit of activity however it has not moved much from where it was beforehand. The market seems to be interpreting the hawkish comments from the BoC members regarding both rates and USMCA as positive for the Canadian Economy and is pricing it in accordingly.<\/p>\n Amid the recent \u2018Global Stock Rout\u2019 the S&P TSX ended October down 6.51% following a somewhat hard month. However, during this risk-off flight to safety, the S&P TSX Index may have had its pain exacerbated by the heavy makeup of energy companies populating the Canadian index.<\/p>\n As discussed in previous articles – Oil – Can basic Economics be responsible for an 11% decline<\/a> \u2013 Oil has seen some very aggressive sell-offs. Current market conditions have the commodity breaking below the $50 a barrel level amid supply concerns and growing global tensions. Keep in mind with Canada\u2019s energy companies occupying an 18.6% weighting of the S&P TSX; undoubtedly this has been a weight around the Index\u2019s neck dragging it lower.<\/p>\n Chief Investment Strategist for BMO Capital Markets, Brian Belski stated that the similar declines were seen in 2012 & 2014 (of 11.5% and 12.5% respectively) on average saw rebounds of 18.22%. And he considers this particular sell-off as no different given that it was a flight to safety out of equities and that the major US indices led the TSX’s decline.<\/p>\n RBC Global Asset Management chief economist Eric Lascelles mirrored this sentiment and stated that despite the reason decline and consumer concern over rising interest rates, the Canadian Economy is healthy and he cannot see it declining further into bear territory. Lascelles also says that instead of fearfully selling off, investors should seek opportunities to buy as the stock market dips since the financial crisis have typically unwound quickly.<\/p>\n So with proactive steps being taken by the Canadian central bank and consensus for a turn around in the Canadian stock market, we could be looking a further strengthening in both the Canadian Economy and potentially the Canadian currency crosses \u2014 certainly ones to consider for the watchlist over the coming months with the next BoC decision taking place on December 6th.<\/p>\n For more information or any questions feel free to reach out to me on twitter \u2013 @Alex_GoMarkets<\/a><\/p>\n![\"\"](\"https:\/\/www.gomarkets.com\/wp-content\/uploads\/2018\/12\/USDCAD-1024x479.png\")
<\/a><\/p>\nCanadian Currency Moves And Economic Stance<\/h5>\n
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<\/a><\/p>\nTrade Agreements And Policies<\/h5>\n
Are Canadian Stock Markets In Trouble?<\/h5>\n
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<\/a><\/p>\nContrary Views To The Health Of Canada’s TSX Index<\/h5>\n
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