Bank of Canada's talk, not action, keeps lid on C$

Thu Oct 20, 2016 5:01pm EDT
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By Andrea Hopkins

OTTAWA (Reuters) - Canada's central bank head whipsawed markets on Wednesday when he mused about considering a rate cut shortly after holding rates steady. But the element of surprise is one of the few tools left to move the currency where the bank needs it to be – a little weaker to help Canadian exports.

Governor Stephen Poloz's revelation that the central bank had "actively discussed" adding stimulus sent the Canadian dollar tumbling - just as he intended, according to some financial market players.

"It was shot across the bow at the currency, which is currently trading at slightly elevated levels to where it should be and where the Canadian economy needs it to be," said Bipan Rai, director of foreign exchange strategy at CIBC Capital Markets.

Poloz has repeatedly said that he does not try to influence the level of the currency and that the best place for the exchange rate to be determined is in the market.

But there is little doubt among analysts that with export growth sluggish, the Bank of Canada prefers a weaker Canadian dollar right now.

"The Bank of Canada certainly liked the decline in the currency over the past two years, but they expected more from it," said Adam Button, currency analyst at ForexLive in Montreal.

With official interest rates near historic lows at 0.5 percent, Poloz acknowledged Canada's central bank has limited room to stimulate the economy by traditional means.

Economists have speculated the bank may want to keep some rate cutting room in reserve for a crisis. Lower rates could also fuel a housing market boom that some warn is reaching bubble levels in Vancouver and Toronto.   Continued...

Bank of Canada Governor Stephen Poloz listens to a question during a news conference in Ottawa, Canada, January 20, 2016. REUTERS/Chris Wattie/File Photo