Bank Of Canada Governor Stephen Poloz Gives The Loonie The Body Slam

Trump in Toronto

On Wednesday, the loonie started to soften during a news conference by Bank of Canada governor Stephen Poloz where he said an interest rate cut was still possible if the Canadian economy deteriorates amid uncertainty surrounding Trump's policies.

The Bank of Canada is broadly expected to keep interest rates unchanged at 0.5 percent on Wednesday.

Overall the central bank forecasts Canadian GDP growth of 2.1% in 2017 and 2018, which implies a return to full capacity around mid-2018. The effects would be muted due in part to a cut in the US corporate tax rate, which would hurt Canadian export competitiveness.

In its quarterly monetary policy report, the central bank noted the Canadian economy would take a "material" hit from a protectionist Trump government.

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Wednesday's monetary policy report is the first since Trump won USA elections.

At 8:55 a.m. ET (1355 GMT), the Canadian dollar was trading at C$1.3111 to the greenback, or 76.27 US cents, weaker than Tuesday's close of C$1.3058, or 76.58 USA cents. His statement immediately drove down the Canadian dollar. And it went a step further in the press release announcing the rate decision, warning recent dollar strength is "exacerbating ongoing competitiveness challenges".

"The outlook, however, is subject to considerable uncertainty, given the unknowns around policy actions by the incoming US administration, particularly concerning trade".

"While prospective protectionist trade measures in the United States would have material consequences for Canadian investment and exports, these measures have not been included in the base case".

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US stocks have already priced in a lot of good news, mostly on the cost side, and Mr. Shenfeld says that if Trump delivers on lower corporate taxes and a lighter regulatory burden, high-single digit earnings growth looks achievable.

The appreciation of the US dollar-recently reaching its highest level in almost 15 years on a nominal trade-weighted basis-should help redistribute global demand, the BoC said.

"In that context, especially with inflation being below target for a prolonged period, yes a rate cut remains on the table and it would remain on the table as long as those downside risks are still present". As of press time, the loonie had fallen nearly a cent to 75.6 cents U.S.

Aubrey Basdeo, head of fixed income for BlackRock Canada, said there are so many variables that it's hard to analyze the impacts of a US border adjustment tax and drop to its corporate tax rate. The country also posted its first trade surplus in more than two years in November, while a Bank of Canada survey last week pointed to improving business conditions.

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Inflation is expected to move close to the 2% target "in the months ahead and remain there throughout the projection horizon" as energy prices rise and the impact of low food prices dissipate.

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