With the economy as an important focus of the campaign in Canada's election, the Liberal party won on promises of additional infrastructure spending to help boost the economy. The proposed fiscal expansion could move the Federal budget from an almost balanced position today to a deficit of about 1% of GDP for two years. If successfully implemented, the fiscal impulse would be likely to take some pressure off the central bank to ease its policy further ahead, says Barclays.
On the other hand, BoC kept its rates unchanged, highlighting positive developments in the non-energy sector, a weaker loonie and a stronger US consumer as supportive to economic activity. Canada is not out of the woods yet so keep bearish CAD in the medium term, as it faces weak commodity prices and slowing global growth; also recent data have not been particularly optimistic.
The market will be monitoring economic activity, inflation and fiscal developments closely in the future in order to assess the likely movements of BoC. In that regard, this week's data will allow us to evaluate the support that the non-energy sector is giving to the economy, as August monthly GDP is released on Friday.
"The market anticipates a moderate expansion of 0.1% m/m, from 0.3% in July. Finally, the additional stimulus signaled by major central banks could prove constructive for the loonie this week, as we anticipate better risk sentiment to support commodity prices", notes Barclays.
