Canadian bonds mixed on dovish Poloz remarks

The Canadian bonds were trading mixed on Wednesday after dovish comments from the Bank of Canada Governor Poloz. The yield on the benchmark 10-year bonds, which moves inversely to its price, moved down 0.45 pct to 1.320 pct and the yield on the 2-year bonds climbed 0.98 pct to 0.621 pct by 1325 GMT.

Yesterday, the Bank of Canada Governor Poloz said that Fiscal action would have much more power than monetary policy now and he put a very low risk of inflation overshooting target sooner than expected. Said he believe markets would function more-or-less normally at rates as low as -0.50% and said yes to use quantitative easing. Said no further policy easing is needed and the potential for an inflation target above 2% is an issue. The European growth has been slow but there are some encouraging signs and lower oil prices 'unambiguously' negative for Canadian economy, he added.

Today, The Canada’s wholesale trade tumbled 2.2 pct in February, against market expectation of 0.4 pct fall, from flat in January. Moreover, wholesale trade ex-autos had largest drop since December 2008.

The Canadian bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of Canada's target. Today, Kuwaiti oil and gas labourers finished a 3-day strike that had briefly cut the OPEC crude output to half, which drag oil prices down. On Sunday, the negotiations between Petroleum Exporting Countries (OPEC) and Russia failed to reach an agreement in the Doha round of talks to strike a deal on oil output freeze. The International benchmark for crude oil prices, Brent futures fell 1.64 pct to $43.30, while West Texas Intermediate crude oil dipped 2.39 pct to $40.10 by 1325 GMT.

Last week, the Bank of Canada announced no change in the overnight rate target of 0.50%, in line with market expectations. Overall, the risks to the profile for inflation are roughly balanced. Meanwhile, financial vulnerabilities continue to edge higher, in part due to regional shifts in activity associated with the structural adjustment underway in Canada’s economy.

According to the statement, growth in the global economy is expected to strengthen gradually from about 3 pct in 2016 to 3.5 pct in 2017-18, a weaker outlook than the Bank had projected in its January MPR, though financial conditions were seen as improving. Overall, the US economy is expected to regain momentum, but with a lower profile and a composition that is less favourable for Canadian exports. The statement noted that the economy continues to create net new employment, especially in services, despite job losses in resource-intensive regions. In this context, household spending continues to expand moderately. According to the Bank of Canada, expectations are now for real GDP growth of 1.7 pct in 2016, 2.3 pct in 2017 and 2.0 pct in 2018.

"We do not think the BoC is about to cut interest rates further; instead we expect it to await further developments on the oil price and see what impact this has on the Canadian economy.  We expect the BoC to increase interest rates for the first time in summer 2017." notes Commerzbank in a report.

Meanwhile, the investors will primarily focus on the upcoming consumer inflation and retail sales figures, which are expected to be released on 22nd April (0800GMT).