Trend taking U-turn as major currencies struggling while CAD gaining heights

Friday, April 23, 2010

Greece is currently negotiating the details of an emergency joint rescue package from the euro zone and International Monetary Fund.

The Greek government has said it wants to reduce the deficit to 5.6% of GDP in 2011 and 2.8% of GDP in 2012. But spending cutbacks measures being introduced by Athens to restore its finances are being resisted. Yesterday tens of thousands of Greek civil servants staged a 24-hour strike in protest against the austerity measures.
The Bank of Canada yesterday continued to keep financial markets guessing about when policy rate increases may begin, but said their time has come. Likely dates are June 1st or July 20th for the first of a series of increases.

Canada’s dollar traded near a 22- month high against its US counterpart in the forex online market as the central bank signaled an increase in interest rates and reiterated that the need for economic stimulus is fading. The currency hit a high of CAD 0.99606 before dropping back to close just below parity at CAD 1.00061.

The Bank only provided detail in a Monetary Policy Report to outlines given Tuesday when it maintained the year-long rock-bottom overnight rate target at 0.25%. It said the need for such extraordinary stimulus is over and it is time "to begin to lessen the degree of monetary stimulus." However, the timing and size of rate increases "will depend on the outlook for economic activity and inflation." And here, on economic activity and recovery from recession, the Report is laced through with cautions.

Inflation is expected to remain anchored at around the 2% target through 2012, with the Bank evidently little concerned about it. Looking at growth, though there was a strong 5.8% recovery in the first quarter of this year, and 3.8% expected GDP increase in the present quarter, this recovery is "front-loaded," the Bank says. Growth will diminish to 3.5% in the second half and more rapidly in 2011, down to just +1.9% in the two final quarters of next year.

From now on, Canadian growth "will revert more quickly to trend," in the Bank's assessment. From the present second quarter this year through all of 2011, growth slows because policy stimulus measures had brought forward "considerably more expenditures" late last year and early this year than expected. Moreover, the Bank expects "a somewhat weaker outlook for US economic growth starting in the second half of 2010." Another drag is "the higher assumed level for the Canadian dollar."
The Bank bases its assessments in part on a Canadian dollar averaging 99 cents against the US dollar over its projection period (through 2012). The Canadian dollar was at parity with the US dollar Wednesday.

On an average annual basis, Canadian GDP is expected by the Bank to grow by 3.7% this year, against just 2.9% expected in the January Monetary Policy Report. Then, growth slows gradually to 3.1% in 2011 (3.5% expected last January), and down to 1.9% in 2012.

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