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Trading  | April 18, 2018

With Canadian economic data at its most disappointing in 20 months, domestic trade-wars over oil pipelines exploding, and a housing market on the verge of collapse, The Bank of Canada held rates unchanged (as expected), sending a weak signal that sparked Loonie selling

Bank of Canada Holds Benchmark Overnight Rate at 1.25%

2018 has not been a good one for Canada’s economy…

but BOC writes off 1Q growth weakness, saying it will rebound in 2Q.

Slower economic growth in the first quarter primarily reflects weakness in two areas. Housing markets responded to new mortgage guidelines and other policy measures by pulling forward transactions to late 2017. Exports also faltered, partly owing to transportation bottlenecks. Some of the weakness in housing and exports is expected to be unwound as 2018 progresses.

Also says the economy will be slightly above potential over the next 3 years, crediting federal and provincial budget measures.

But the FX market is not buying it…

The central bank played down a faster-than-expected pick-up in inflation as temporary, arguing the shocks of higher gas prices and minimum wages in some provinces will dissipate by 2019.

These releases codify Poloz’s narrative the expansion can be prolonged without fueling inflation.

Key highlights (vis Bloomberg):

  • BOC reiterates that “Governing Council will remain cautious with respect to future policy adjustments” and be “guided by incoming data”

  • BOC: “Higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed”

  • Inflation expected to average 2.3% over 2018, from 2.0% previously; Core measures have edged up to near 2 percent, “consistent with an economy operating with little slack”

  • Wage growth is firming, but Bank “will continue to assess labour market data for signs of remaining slack”

  • Bank of Canada makes upward revision to 2019 growth: GDP expected to grow 2.0% in 2018 and 2.1% in 2019, from 2.2% and 1.6% respectively;

  • Housing will not contribute to growth in 2018 and 2019, exports will not contribute to growth in 2018 (from +0.6pp previously)

  • Export growth is “being increasingly limited by capacity constraints in some sectors”, and both exports and business investment are “being held back by ongoing competitiveness challenges and uncertainty about trade policies”

  • Export contribution to growth in 2018 revised down to 0.0pp, from 0.6pp in last MPR

  • BOC: “The prospect of a notable shift toward protectionist global trade policies remains the most important risk affecting the outlook”

  • BOC outlook on geopolitics and trade: “Escalating geopolitical and trade conflicts” could undermine global expansion; “Wide range of outcomes” still possible for NAFTA; “Monetary and fiscal policy are expected to support economic activity over the projection horizon and to help mitigate the drag on business investment and exports associated with trade-policy uncertainty and trade competitiveness challenges”

Finally, we note Canada is increasingly becoming a one-trick-pony…

Canada’s share of U.S. non-energy goods imports has fallen to about 10% from 17% since around 2002…

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