EU focus: Canada's Dollar weakens for a second day on central bank, recovery outlook

The Canadian dollar weakened for a second day after the Bank of Canada indicated future interest- rate increases are on hold because the nation’s economic recovery is threatened by the currency’s climb beyond parity.

“There had been a lot of speculation recently about a tightening, possibly as early as March,” Mathieu D’Anjou, a senior economist at Desjardins Group, said. “Given what the bank said yesterday, this seems much less probable now. The bank really doesn’t seem in a hurry to boost its target rate, and this has been putting pressure on the currency.”
The central bank predicted in its Monetary Policy Report released today a “modest” economic recovery hampered by a strong currency that limits exports. It said a “gradual” reduction of monetary stimulus through 2012 will keep inflation under control.
The yield on Canada’s 2-year note fell eight basis points to 1.69 percent, the biggest decline since Sept. 7.
Canadian Finance Minister Jim Flaherty’s decision Jan. 17 to tighten rules in an attempt to curb record household borrowing may allow the Bank of Canada to hold off on raising interest rates before May at the earliest, David Rosenberg, chief economist at Gluskin Sheff & Associates in Toronto, said in a note to clients today.
Canada’s gross domestic product will grow 2.4% this year and 2.8% in 2012, the Bank of Canada said yesterday, compared with an October forecast for gains of 2.3% this year and 2.6% next year.
Yesterday’s statement “was less hawkish than the market had anticipated, with the Bank of Canada highlighting an improved global economic outlook and a better growth profile for Canada,” Camilla Sutton, chief currency strategist at Bank of Nova Scotia’s Scotia Capital unit, wrote. “However, this was offset by the bank’s view that inflationary pressure remains subdued and the impact that a strong Canadian dollar has on restraining exports.”