BOC State of Play:Could The CAD Lead To a Pause In Tightening?

By Yali N'Diaye

     OTTAWA (MNI) - From being data dependent in July's policy statement to also

being guided by financial market developments in September's statement, the Bank

of Canada is now clearly indicating the stronger loonie is high on its radar

screen.

     In the September 6 statement accompanying the BOC's decision to hike its

key policy rate by 25 basis points to 1.0%, the central bank felt compelled to

mention the Canadian dollar's appreciation.

     While it was partly justified by the strength of the Canadian economy, it

partly resulted from the weakening of the U.S. dollar, it said.

     The BOC became even more explicit Monday, with Deputy Governor Timothy Lane

repeating that not only will the BOC pay attention to the sensitivity of the

economy to higher interest rates, as the September statement said, but also

specifically to the stronger loonie.

     In fact, he said of the strengthening Canadian dollar, "we'll be taking

that into account pretty strongly in making our decisions."

     The wording sounded strong enough to indicate the central bank could give

itself time to assess the impact of the rising loonie and its sustainability

before moving further ahead on the tightening path.

     The Canadian dollar has indeed been weighing on industrial prices, which

were down 1.5% in July, recording their largest decline since December 2014,

most of it related to the appreciation of the Canadian dollar. Had the exchange

rate remained constant, the industrial product price index would have decreased

0.4% instead of 1.5%.

     Meanwhile, the latest manufacturing data suggested the projected GDP growth

slowdown in the third quarter is materializing, with Statistics Canada reporting

Tuesday that manufacturing sales fell 2.6% in July, more than the 1.5% drop

expected by analysts in a MNI survey.

     Governor Stephen Poloz will be next in line on September 27 to further

clarify the central bank's state of mind and whether the Canadian dollar

appreciation could risk becoming a challenge to the export growth outlook and

the inflation outlook.

     In July, while the merchandise trade deficit narrowed to C$3.0 billion,

exports fell 4.9%, following a 5.0% drop in June. Real exports fell 1.1%.

     A cumulative two-month decrease of this magnitude has not been observed

since December 2008-January 2009.

     Exports to the U.S., Canada's largest trading partner, far ahead of China,

contracted 3.2% in July and 5.8% in June.

     On the import front, the 6.0% decrease was in large part due to a price

effect, as prices were down 3.8%.

     By the next policy decision on October 25, the BOC will have had another

look at the export performance, not only through Statistics Canada's August

data, but also via the assessment of businesses in the Business Outlook Survey

on October 16.

     For now, however, Lane is "seeing encouraging signs that exports and

business investment are broadening and strengthening."

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

[TOPICS: M$C$$$]