The Bank of Canada (BOC) will hold its next policy meeting on July 21st. At the April policy meeting the BOC lowered interest rates to a record low of .25% and said they would keep the rate at this level through June 2010 because inflation pressures remain low. The Bank of Canada is expected to maintain steady rate policy and refrain from implementing quantitative ease at tomorrow's policy meeting. The Bank of Canada expects the Canadian economy to improve by year-end and the BOC will likely upgrade their outlook for Canada's economy. The BOC forecast for Canada's economy will be released four times a year. This is a change from the prior release schedule of releasing economic forecasts just two times over the course of the year. The BOC's economic forecast will be released in the July 23rd Bank of Canada Monetary Policy Report.

Recent Canadian economic data has been mixed. Canada's unemployment rate rose to its highest level in 11 years at 8.6%, industrial production has been negative and the trade surplus turned to deficit. The housing market, consumer confidence and bank lending has improved. The forward-looking economic data from Canada suggests that the Canadian economy will recover into 2010. Friday, Canada reported that consumer prices fell to negative for the first time since 1994. Canada's June CPI declined 0.3% m/m. The downward pressure in the CPI was concentrated in the volatile energy prices. Core inflation remains near the BOC target. The CPI decline is not likely to encourage the Bank of Canada to expand monetary ease at Tuesday's policy meeting because the BOC expects inflation to rise as Canada's economy recovers.

 

The CAD weakened to a six week low at the end of the second quarter pressured by falling equity markets, declining risk appetite and weaker commodity prices. Monday, CAD traded at five week high as global equity markets and risk appetite improves. The impact of the Bank of Canada meeting should be limited because there are no major surprises expected. The CAD may rally if the Bank of Canada upgrades its economic forecast for Canada's economy. The trade will begin to debate when the BOC might elect to raise interest rates. According to a Reuters poll of Canada's 12 primary dealers the slow pace of Canada's economic recovery will prevent the BOC from raising interest rates until first half of 2010. According to the Reuters dealer survey the BOC is unlikely to implement quantitative ease unless the economy experiences another downturn.

The technical outlook for CAD has improved with last week's break of 1.1200. Expect USD/CAD support at 1.0930 the June 4th low with resistance at 1.1350 the July 15th high. A break of 1.0930 support could spark a rally to the September 30th high of 1.0665.