Canadian Dollar turns around after BOC cuts forecasts

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LONDON (ShareCast) - The Bank of Canada (BOC) has lowered its economic forecasts on Wednesday, sending the Canadian dollar lower as volatility spiked in the first moments following the announcement.

The central bank lowered its 2013 economic forecast to 1.5% from the 2.0% predicted in January. However, BOC Governor Mark Carney kept the key interest unchanged at 1.0% and maintained his hawkish bias. After the USD/CAD (Milan: CAD.MI - news) reached a high of $1.0293, the Canadian dollar began to strengthen.

"We need to go back to the context," Carney said. "Interest rates are at one per cent, we have a financial sector as resilient as any in the world, there is slack in the economy, but it's not that big and it's not that big, relative to other major economies."

Carney said the bank's key interest rate is already providing very significant stimulus.

The BOC was one of the first central banks to begin a cycle of monetary tightening when it hiked the interest rate in three consecutive monetary policy meetings starting in June of 2010. It has not touched the key interest rate since but has maintained a relatively hawkish bias while other major central banks stepped up their accommodative measures.

The lower growth forecast follows recent downward revisions by other top economic organisations, suggesting that economists have been generally over-optimistic for 2013, specially for Europe. On Tuesday, the International Monetary Fund (IMF) lowered its own growth forecast for Canada to 1.5% from 2% and said it will be the slowest in the Group of 20 outside Europe.

"The members of the Bank of Canada have clearly followed the lead of many central bankers and the market as a whole in developing a more cautious stance on the pace of global growth in 2013," said Adrian Miller, Director of Fixed-Income strategy at GMP Securities LLC.

As a major oil exporter, Canada's growth expectations may be further subdued due to lower commodity prices, and could actually become an argument for rate cuts. However, the Canadian dollar is already facing downward pressure from lower commodity prices led by the drop in gold and weak economic data in China.

The downward forecasts revisions are likely to reduce the chance of rate hikes. Additionally, the Canadian dollar is already seen benefiting from accommodative policies embarked by other central banks, with investors chasing higher yields.

JP