Capital Properties FX
Capital Properties FX

USDCAD After Bank of Canada Meeting


On weekly basis, USDCAD moved in a rather odd manner. Since the pair made its recent low at 1.2450 area, we’ve moved higher slowly. However, the weekly price chart looks rather ugly. The recovery took too long and the price structure looks more like a range tilted to the upside. After this week’s Bank of Canada meeting, the overall picture remained the same. However, it seems that change is just around the corner.

“You are all a lost generation.” – Gertrude Stein to Ernest Hemingway

Slowly but firmly BOC moves towards its first rate hike in almost seven years. The released rate statement was surprisingly hawkish and supportive of policy change. It’s clear that the bank likes current developments in the Canadian economy. Recent monetary policy statements have reflected it as well. They don’t talk anymore about cutting rates and instead, the focus shifted to the other end of the spectrum.

The upbeat tone of the statement is perhaps the first clear clue that change comes. From a certain perspective, that would also explain the odd price action in USDCAD. The pair waits for the right trigger to move again. Historically speaking, Loonie likes to trade near parity which means we have roughly 3000 pips to drop. While this month’s Bank of Canada meeting didn’t trigger any large moves, the next meetings will have a different outcome.

Read Also: Janet Yellen – Rate Hikes After May’s Core CPI?

OPEC Meeting

Canada is the 7th largest oil producer in the world (a non-OPEC member). Hence, the Canadian dollar moves with the oil price and the oil market in general. If oil price goes up, CAD starts to flex its muscles and vice versa. Ever since the oil crashed from 100 dollars per barrel to mid $40’s, oil producing countries struggled to make both ends meet.

This week members of OPEC announced that they will extend cuts in oil output by additional nine months. The goal is to reduce supply and through that, drive the oil price higher. After the announcement, the oil dropped another 4 percent.

In general, if the oil price should continue its decline, then we should see additional weakness in CAD as well. Also, as Canadian economy depends on crude petroleum exports, it is vulnerable to shocks in the oil market. BOC claims that Canada’s economy adjusted itself to lower oil prices but one can never be sure.

Federal Reserve Meeting Minutes

Bank of Canada meeting, however, wasn’t the main event of the week. Traders were looking forward to finding out the details of the previous FOMC meeting. The dollar bulls hoped that the minutes would bring some sort of a reversal into the game. Unfortunately for them, the minutes weren’t hawkish at all. In fact, the outcome was quite the opposite.

While the members of the FOMC saw tightening appropriate soon, a few policymakers pointed out that inflation lacks momentum. We all know how important subject inflation is to the central banks. Hence, the market continued selling the American dollar. Furthermore, the FED claims to be confident that the Q1 weakness will go away, however, the minutes revealed that they will look for evidence.

I think we all remember when the FED started talking about rate hikes in 2015. The entire year they emphasized that they need more evidence that the U.S. economy is ready for higher rates. It took them exactly 11 months to make the first move. So, from that perspective, the word “evidence” definitely doesn’t inject confidence into investor’s minds.

Leaving the potential rate hikes and inflation worries aside, the minutes brought some clarity into FED’s balance sheet reduction plan. In reality, no one knows how the reduction will to affect the markets. The FED claims that the impact is minimal. However, a fair amount of economists sees it very differently. Most likely we have to wait and see what happens when the process starts.

Conclusion

Bank of Canada meeting turned out to be rather hawkish. It looks like the Bank prepares to make some changes in the current monetary policy. However, there’s also a downside risk and that is the oil price. If crude starts another long-term decline then the BOC’s optimistic outlook may go with it. Also, there’s the question of the exchange rate. Right now the USDCAD is trading around 1.34 which is very good for Canada. BOC has stated several times that lower exchange rate contributes to the economic recovery. If we remove that from the equation, will the Canadian economy continue to expand at a similar pace?

Capital Properties FX
May 27, 2017

Read Also: Is the FED Rate Increase in Cards After Last Week’s NFP?

Related Reading
The time is now that we have got to end secrecy at the Fed” – Senate Session, Part 1 – U.S. Senate, (Washington, DC: C-Span, May 11, 2010)
We shouldn’t be playing around with inflation“: Robert Costa, “Palin to Bernanke: Cease and Desist” – National Review Online, November 7, 2010