Wednesday, 23 October 2013

Bank of Canada cuts economic outlook, drops rate hike signal

G&M: Bank of Canada cuts economic outlook, drops rate hike signal

"The bank is cutting its forecast for both the Canadian and U.S. economies – not just for this year, but for 2014 and 2015 as well.
The bank pointed to an economic environment that is now “less favourable for Canada” – most notably, the painfully slow recovery from recession in the United States, Canada’s main trading partner."
"...however, the Bank must also take into consideration the risk of exacerbating already-elevated household imbalances. "

"BoC says they don't concern themselves with specific housing markets, but there could be structural reasons for some "unusually strong" markets" - @BenRabidoux

My take:
- As expected, Canadian economy continues to show slack

- BoC dropping rate hike signal, whilst mentioning "risk of exacerbating already-elevated household imbalances", may "nudge" Flaherty/OSFI toward further mortgage rule tightening, now that prime rate's not going up any time soon.

- As I've mentioned before (either in this blog or in other forums), more than half of my investments are in US currency, exchanged when CAD/USD was above par.  I agree with @BenRabidoux that "BoC will LAG the Fed in next rate cycle" (ie US will hike their rates earlier than Canada), which is negative for CAD.  I intend to purchase more USD down the road whenever exchange rate gets favorable.

- CAD/USD just took a tumble after BoC cuts econ outlook, from 97.3 yesterday down to now 96.3. If CAD/USD continues its decline (which I think it gradually will), the big loser will be holders of illiquid, over-valued CAD assets.

- RE bubbles will still “deflate” despite being in a persistent low-rate environment. For those who plan to buy in the next couple years, a good scenario would be having had a RE price correction & CAD/USD correction (provided you have liquid USD investments), while interest rate remains low (yes you can have the cake and eat it too).

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