BoC Monetary Policy Report: Cautious optimism for Canadian Economy

In the April 13 release of the Bank of Canada's (BoC) Policy Report, there was a noticeable shift from previous reports of resource sector challenges and slow recovery in manufacturing to better days ahead. While the report highlights that "positive economic forces are starting to outweigh the negative", it's important to exercise cautious optimism for the Canadian economy.

The new outlook

The BoC raised its forecast for GDP growth in 2016 from 1.4% to 1.7 %, with 2.3% in 2017 and 2.0% 2018.

Report highlights project:

  • Overnight rates unchanged for now
  • Rate cut not expected in 2016
  • Improved financial conditions for Canada

The odds of actual rate changes deviating from these expectations is low knowing what we know today regarding the Canadian economy. The outlook for Canada’s non-resource sector continues to improve - which means more investment and jobs. The Canadian resource economies continue to struggle as resource prices are off their recent lows. The economic growth in Canada is fragile and benefits from a low Canadian dollar.

What this means for the Canadian dollar

The primary drivers in the Canada/U.S. exchange rate are the price of oil and the spread between economic growth in Canada and the U.S. A more positive BoC forecast for the Canadian economy implies less of a different outlook for the Canadian and U.S. economies, and support a higher Canadian dollar.

However, the overall market fundamentals in oil remain relatively weak. As a result, I’d expect the Canadian dollar to strengthen but remain below the $0.80 mark for 2016. All eyes will now be on the U.S. Federal Reserve’s April 27 announcement and U.S. oil inventories.

Impact on the Canadian agriculture and agri-food sector

For the Canadian agriculture and agri-food sector, the BoC report is largely neutral. Better than expected growth will mean improved opportunities domestically. Conversely, it also supports a slightly higher Canadian dollar and perhaps tighter profit margins.