Canadian dollar firms as BOC leaves benchmark interest rate unchanged

Posted December 08, 2016

Stock futures pointed to a slightly lower opening for Canada's main index on Wednesday as investors awaited the Bank of Canada's decision on interest rates.

The Bank of Canada is holding its key rate at 0.5% largely due to lower expectations for the economy going into the new year.

December futures on the S&P TSX index SXFc1 were down 0.04 percent at 7:35 a.m. ET.

"The Bank's only reference to the US election was to point to the sharp rise in global bond yields that occurred since November 8 as markets priced in expectations that the new government will implement a fiscal stimulus plan that will support stronger economic growth".

Canadian government bond prices were higher across the yield curve in sympathy with U.S. Treasuries and German government bonds amid expectations the European Central Bank will extend its bond-buying stimulus scheme this week.

While global economic conditions have strengthened, the bank said that uncertainty, which has been undermining business confidence and dampening investment in Canada's major trading partners, "remains undiminished".

The US Dollar (USD) plunged sharply against the Canadian Dollar (CAD) on Wednesday, dragging the price of USDCAD to less than 1.3250 following the announcement of monetary policy from the Bank of Canada (BoC). The world's 10th largest economy still must navigate a return to full output the bank has said will take until mid-2018.

The language of the policy statement was largely neutral and indicated that the current stance of monetary policy remains appropiate as CPI inflation has picked up and as the dynamics of growth are consistent with what the Bank had anticipated.

Canada ships three-quarters of its exports to the USA, making President-elect Donald Trump's possible mix of fiscal stimulus and trade protectionism a key question north of border.

In making the scheduled announcement Wednesday, the central bank said its decision also came as the economic environments in Canada and overseas had largely moved forward in line with its expectations.

"Consumption growth was robust in the third quarter, supported by the new Canada Child Benefit, while the effects of federal infrastructure spending are not yet evident in the (gross domestic product) data", the bank said in its brief, one-page statement.

As for the economy, it grew at a 3.5% clip in the third quarter as the energy market snapped back and households opened up their wallets.