These are stories Report on Business is following Wednesday, July 16, 2014.
'A loonie and a dove'
Watch the Canadian dollar this morning as the Bank of Canada releases its rate statement and monetary policy report, and Governor Stephen Poloz speaks to reporters.
He has a knack for knocking the currency lower.
“I suspect we’ll see some Canadian dollar weakness,” said chief currency strategist Camilla Sutton of Bank of Nova Scotia.
She expects the combination of the statement, report and news conference will “highlight the risk to the economic backdrop” of a stronger loonie, as Canada’s dollar coin is known.
Economist David Rosenberg agreed.
In a report titled “Bird watching: A loonie and a dove,” the chief economist at Gluskin Sheff + Associates noted that the “risks are tilted increasingly toward a very dovish press statement that could well underpin a softer tone to the loonie.”
The Canadian dollar has been sinking since Mr. Poloz took the helm of the central bank. It eroded in the first quarter of the year, and rebounded in the second, most recently trading in a range of about 93 cents U.S. to 94 cents.
That's a level that is no doubt causing some squirming in the seats at the Bank of Canada.
The central bank now holds what is known as a neutral bias, which means it’s sending no signal to the markets of whether the next move in its benchmark rate could be up or down.
Mr. Poloz, however, has left the door open to a rate cut, which had helped hold the currency down. And the weak jobs report from Statistics Canada last week helped feed into that.
The ups and downs of the loonie, which is just below 93 cents this morning, make for a huge issue in Canada, as the central banks holds out hope for an export rebound and manufacturing jobs disappear.
“While there’s no disputing the Canadian manufacturing sector has been in secular decline for more than 30 years, the loonie has been a pivotal factor in driving activity,” senior economist Benjamin Reitzes of BMO Nesbitt Burns said in a research note this week.
“Clearly the run to parity had a devastating impact on the sector,” he added, referring to his research - in chart form here - that shows how the movement in the currency has affected factory jobs, with a lagging impact.
“The only good news here is that the chart suggests we may be nearing a bottom on manufacturing employment. Indeed, if the loonie weakens as we expect, that could mean some improvement in a year or two.”
Here’s what some economists are saying:
“Even though most forward-looking indicators remain positive, we suspect that the overall tone will be cautious with the emphasis shifting a little away from current inflation trends towards the recent shortfalls in growth, the resultant increase in slack - both at home and abroad - and the increased importance that it places on the rotation towards exports and capital spending.” Mark Chandler, Ian Pollick, RBC Dominion Securities
“We don’t expect a notable shift in the BoC’s policy tone. The BoC will likely revise up its inflation forecast, but maintain that strong inflation is driven by transitory factors. They may slightly tweak the language on downside inflation risks, but point to weak near-term growth.” Emanuella Enenajor, Bank of America Merrill Lynch
“In our view, with a pickup in exports not yet entrenched, elevated slack, weak job creation, and ongoing corporate caution on investment, the bank would be justified in maintaining a decidedly cautious tone, and looking through the recent rise in inflation,” David Watt, HSBC Bank Canada
“Although financial markets are still leaning towards [Bank of Canada] rate increases late next year, we still think that the next move is more likely to be a cut. Rates will have to remain low for longer than consensus to support a weak economy hindered by sluggish exports and a housing downturn.” David Madani, Capital Economics