Poloz holds rate, warns of trade threats

Canadian dollar nears 8-month high ahead of Bank of Canada rate decision

The Canadian dollar strengthened against its USA counterpart on Monday, with the currency moving closer to last week's eight-month high ahead of an interest rate decision on Wednesday from the Bank of Canada.

The loonie took a hit after the Bank of Canada struck a neutral tone and held its interest rate steady at 1.75 per cent, but recovered its momentum by late afternoon to trade above 76.5 cents to the USA dollar.

The bank is now projecting real GDP growth to average 1.3 per cent in 2019 before rising to two per cent in 2020 and 2021.

It's the third time in 2019 that the interest rate has held steady at 1.75% after the Canadian economy showed signs of returning to potential growth.

"The Bank of Canada set a pretty low bar in terms of its second-quarter growth numbers", said Royce Mendes, a senior economist at CIBC Capital Markets.

Meanwhile, Fed Chairman Jerome Powell reinforced expectations the US central bank will cut interest rates for the first time in a decade at its next monetary policy meeting later this month, saying trade uncertainties and concerns about the global outlook continued to exert pressure on the American economy.

The Canadian economy is rebounding at a stronger-than-expected pace from a weak run that almost ground the economy to a halt in late 2018 and early 2019.

He predicted the second half of 2019 to see a drop in residential investment, weaker exports due to slowing US growth and for Canada's over-stretched households to curb spending. The Fed has signaled a rate cut could come as soon as the end of July due to growing risks to US economic growth. Investors see at least two Fed rate hikes by December. But its tone suggests a cut is more likely than an increase, a shift from earlier this year. Its unemployment rate fell in May to its lowest level since 1976.

The BoC left its main interest rate unchanged at 1.75%, as was widely expected.

Wide Canadian banks, on the other hand, possess to fear about more than neatly suited the hobby-rate moves of the Financial institution of Canada.

USD/CAD tumbled from 1.3126 to 1.3073 as of 17:40 GMT today.

Barclays Capital analyst John Aiken wrote recently that the "ability for the banks to grind out mid-single digit earnings growth for the year could prove challenging", and that a Bank of Canada rate-cut could hurt the outlook of lenders who are more exposed to the Canadian market. "Canada is still somewhat optimistic that growth will pick up in Q2... though they're still concerned about trade tensions, a slowing global economy". Macdonald said she doesn't think the anticipated US slowdown later this year will be enough to warrant a rate cut by the Fed. Trade conflicts between the United States and China, in particular, are curbing manufacturing activity and business investment and pushing down commodity prices.

He added that any rate cut by the U.S. Federal Reserve at one of its upcoming meetings would be a key development for the Bank of Canada.