width=134Release: Bank of Canada Interest Rate Decision
Consensus Forecast: 1.0%
FXTimes Forecast: 1.0%
Previous: 1.0%
Date/Time: 12/6/11 at 9:00AM ET (14:00 GMT)

1.) BOC Rate Decision to Show Central Bank Not in a Hurry To Raise Rates

The Bank of Canada rate decision may not be that big of a factor considering they  are content to stay in a wait-and-see mode as the European sovereign debt crisis continues to pose high uncertainty on the global economy.

width=333In the previous Bank of Canada interest-rate decision, policy makers placed more emphasis on downside risks to inflation, saying headline CPI will fall to 1% by the middle of next year.

From Bank of Canada Statement: As a result, core inflation is expected to be slightly softer than previously expected, declining through 2012 before returning to 2 percent by the end of 2013. The projection for total CPI inflation has also been revised down, reflecting the recent reversal of earlier sharp increases in world energy prices as well as modestly weaker core inflation.  Total CPI inflation is expected to trough around 1 per cent by the middle of 2012 before rising with core inflation to the two per cent target by the end of 2013, as excess supply in the economy is slowly absorbed.


Currently inflation has been above the 2% target for 11 months straight.

Therefore, it seems the BOC is in no hurry to raise interest rates, but it's one of the few that is in a position to do so over the next year. Provided the economy continues to grow at a pace which is about double the G-10 average.

From Bloomberg: Canada's economy is growing at 3 percent, twice the average pace of Group of Seven and euro-area nations. Finance Minister Jim Flaherty pledged his Conservative Party government will eliminate the budget deficit, forecast at C$31 billion this fiscal year, or 4.3 percent of output, by 2015. The U.S. deficit is $1.3 trillion, or 9.6 percent of output...

2.) Only Country in G-10 Forecast to Raise Rates Next Year

In a poll by Bloomberg we see that Canada is the only country in which forecast is for an interest rate increase.

From Bloomberg: Bank of Canada Governor Mark Carney will be the only central bank leader in the Group of 10 countries to raise interest rates next year, according to forecasts compiled by Bloomberg News.

That can help favor the Canadian dollar from interest-rate perspective against other key currencies. However these are long-term implications as an interest rate hike is not expected until late next year.


If we look at overnight index swaps - the expectations one year out for the Bank of Canada - money markets expect to see the BOC remain at 1% in 1 year's time. Therefore there's little bit of divergence between this measure and the poll done by Bloomberg. Still growth is proceeding at a pace which should see the bank decide it is warranted to raise interest rates earlier than other G-10 nations.

3.) Canada as a Safe Haven? Well No, But it Has Stable Banks and Good Fiscal Policy

In another factor, Canada has earned a reputation as a country with a sound banking system and strong fiscal position, and is better suited to attract flows looking for safety and decent returns, without the hassle of exposure to the debt woes seen in Europe, the UK, the US, and Japan. Canadian assets may see higher demand which increases the demand for the Canadian Dollar as well.

While it seems a bit paradoxical considering how closely correlated the Canadian dollar is to risk assets and the S&P and especially oil, perhaps Canada, can act as a proxy to the US Treasury market, but without all the baggage.

From Bloomberg: Canada's economy is growing at 3 percent, twice the average pace of Group of Seven and euro-area nations. Finance Minister Jim Flaherty pledged his Conservative Party government will eliminate the budget deficit, forecast at C$31 billion this fiscal year, or 4.3 percent of output, by 2015. The U.S. deficit is $1.3 trillion, or 9.6 percent of output...

Despite external headwinds, the Canadian economy has shown a fair amount of resilience, underpinned as it is by a stable and healthy banking sector and solid fiscal position Robert Sinche, global head of currency strategy at Royal Bank of Scotland Plc's securities unit in Stamford, Connecticut, and another analyst at the company, Farrukh Khan, wrote in a Nov. 29 research report. They recommend buying the Canadian dollar versus the euro and forecast it will strengthen to C$1.28 per euro from C$1.36521 last week.

If the ECB was to cut interest rates by a quarter point this week then the ECB and the BOC would both have the same interest rate at 1%. When trying to avoid exposure to Europe investors may start turning to what seems a more sound country for bonds and other assets. Again, that would increase demand for CAD.

4.) A North America Growth Story

width=314Another advantage for Canada in the next few weeks and perhaps months is the better-than-expected data coming out of the US economy - which shows the prospect of the US recovery gaining a bit of momentum.

As 70% of Canada's output goes to the US it would directly benefit from a stronger rebound from stronger growth in the North America. This would be doubly true if the Fed decides to do further quantitative easing which should boost US and Canadian assets.

If we look at Australia and New Zealand dollars, the Canadian dollar'ss commodity currency counterparts, their fate is tied much more closely to China, India, and the rest of Asia. China is expected to slow and that may pressure the amount of export orders flowing to Australia and New Zealand.

Europe and the UK are also facing a period of flat to contractionary growth and so North America (the US and Canada) currently look like a bright spot in the global economy.

The Canadian dollar could be able to benefit from that factor.

5.)  Oil Prices Set to be Supported on Tensions Between the West and Iran

Being a big exporter of crude oil Canada would benefit from rising oil prices. The tensions in the Middle East, especially with Iran - the #5 exporter of oil in the world - would certainly add in a risk premium for Brent and then WTI crude.


Looking at WTI prices , we see the strength in oil over the last two months, and we currently reach an important point around the $100 barrel level. If oil pops above the $102.50 area and stays above there that would be supportive for the Canadian dollar going forward as well.

Nick Nasad is the Chief Market Analyst at FXTimes - provider of Forex News, AnalysisEducationVideosCharts, and other trading resources.