Bank of Canada upgrades core inflation forecast
Overnight, the Canadian dollar rallied from above 1.1280 to below 1.1200 against the US dollar after the Bank of Canada raised its core inflation projections for 2014 H2 and 2015. Economic growth expectations from 2014 H2 to 2016 were also marginally raised. On the bright side, the housing market, consumer spending and exports are improving. However business investment remains weak and lower oil prices will dampen the terms of trade and income effect. We maintain our view that the BoC will tighten monetary policy in the second half of 2015 given that the economy is expected to reach its full capacity only in the second half of 2016 with both core and headline inflation reaching 2% on a sustained basis. Lower oil prices late last night resulted in some profit taking in the Canadian dollar which eased back to above 1.1250 early this morning. Our 2014 and 2015 USD/CAD year end forecast of 1.15 and 1.20 remains unchanged.