AUD/CAD: Loonie Dips as BOC Signals Longer Rate Pause

The Canadian dollar is deemed to lose further ground opposite the Australian dollar today as the Bank of Canada lowered its economic estimates and said it will likely keep interest rates unchanged longer than previously anticipated. Meanwhile, the Aussie is believed to receive a lift from a buoyant update from China’s manufacturing sector, bolstering prospects further for the Chinese, as well as the Australian economy.

The Bank of Canada held its benchmark interest rate at 1 percent yesterday, but it revised its guidance substantially to say that excess capacity in the economy, subdued inflation, and stabilizing household debt have all combined to push any rate increase further away than previously thought. The central bank acknowledged that it significantly underestimated the weakness of the economy. It shaved three-tenths of a percent from its growth projections for both 2012 and 2013 to 1.9 percent and 2 percent, respectively. It also does not expect the economy to hit full capacity until the second half of 2014 and not the end of 2013 as it forecast last October. As such, inflation is expected in the near term to remain around 1 percent, the bottom of its target range of 1 to 3 percent.

Corroborating the dimmer outlook, the International Monetary Fund said yesterday that it now expects the Canadian economy to expand by only 1.8 percent this year, lower than the 2.0 percent estimate it forecast three years ago. Governor Mark Carney has been the most hawkish central banker in the Group of Seven nations, but he has steadily watered down his guidance on the need to start hiking rates. According to economists, the change likely suggests that the BOC will not move to tighten borrowing costs until some time in 2014 or until it has more compelling evidence that the Canadian economy is gaining some renewed steam. Considering this rate outlook, the Loonie is apt to dwindle further.

Meanwhile, a bolstering outlook for the Chinese economy is seen to likewise improve prospects for the resources-oriented Australian economy. The preliminary HSBC China manufacturing PMI rose from 51.5 points to a 24-month high of 51.9 points in January. The index has now been in expansionary territory for three consecutive months, suggesting growth for the sector. Gains in new business have likely led manufacturers to power on with higher production, hiring and purchasing activity. Considering that China is Australia’s largest trading partner, demand for the Aussie is deemed to rise. As such, a long position is recommended for the AUD/CAD trades.

Aviv N. Shapiro is a Senior Research Analyst and Business Development Officer for AlgosysFx.