Market Focus 19/20 JAN 2010: Bank of Canada rate decision & Canadian CPI

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Market Focus 19/20 JAN 2010: Bank of Canada rate decision & Canadian CPI

Bank of Canada expected to keep rates steady at 0.25%
Year-on-year CPI to increase to 1.6% from 1.0%
Strength of Canadian dollar may pose risk to economic recovery


The Bank of Canada will announce its decision on interest rates at 14:00GMT on Tuesday 19th January and CPI data for December will be released at 12:00GMT on Wednesday, followed by the Monetary Policy Report on Thursday at 15:30GMT.

Analysts polled by Reuters expect the central bank to hold rates at a record low of 0.25% (where they have been since April 2009) and repeat their intention to keep the benchmark rate at that level until the end of the second quarter of 2010, as outlined in the April 2009 Monetary Policy Report (MPR). The latest MPR will be released on Thursday and will contain the central bank’s views on the Canadian economy.

Data that traders will also focus on are the December CPI figures, with markets expecting –0.1% and –0.2% for the month-on-month headline and core numbers respectively. The year-on-year CPI is forecast to increase to around 1.6% from 1.0%, reflecting the rise in gasoline prices and pushing the CPI close to the 2.0% target set by the central bank. The Bank of Canada revised its prediction for a return to the inflation target in the October 2009 MPR by saying that it would be the third quarter of 2011 before the objective is reached. Although the new MPR due on Thursday will give a clearer view of the central bank’s projections, the market may act if the CPI data shows that inflation is rising faster than expected (a year-on-year core CPI of 1.9% would be sufficient enough to achieve that result).

The strength of the Canadian dollar has also been an issue for the central bank, with the surge in commodity prices being a factor behind the loonie’s rise to a three-month high versus the greenback. If the Canadian dollar is able to reach the parity level versus the U.S. currency, this may increase the downside risk to the economic recovery (especially in terms of exports) and dampen growth expectations in 2010. As such, the central bank will not want to sound too hawkish and make comments on withdrawing its easy monetary policy anytime soon.

The Canadian dollar will stand to benefit from a hawkish tone from the central bank and its MPR, as well as upbeat CPI data; however, traders will also be looking to take profits following the loonie’s recent rally. Any comments that are skewed to the dovish side may result in a rebound in the usd/cad rate as short positions are unwound.


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