Bank of Canada Preview - What to Expect for USD/CAD

The U.S. dollar traded higher against all of the major currencies today as stronger U.S. data, a gap higher in the Dow Jones Industrial Average and uptick in 10 year Treasury yields revive demand for the U.S. dollar. No news is also good news for the greenback as the lack of antagonistic tweets from President Trump towards Russia and China allowed the dollar to rise. Building permits and industrial production rose more than expected. Although housing starts fell short, they still increased from the previous month. The Federal Reserve's Beige Book is schedule for release tomorrow and chances are they will report ongoing improvements in the U.S. economy. With all of this in mind, the dollar's rally is modest, as investors have grown weary of geopolitical risks.

Meanwhile the main focus tomorrow will be the Bank of Canada's monetary policy announcement. No policy changes are expected but the Canadian dollar's price action tells us that investors are looking for positive comments from the central bank. A lot has changed since their last meeting in March. Six weeks ago, they expressed concerns about lower wage and household credit growth but since then, oil prices hit a 3 year high, retail sales rebounded, the unemployment rate declined, job growth accelerated, housing market activity improved, inflation increased and manufacturing activity expanded at healthy rate. Both U.S. President Trump and Canadian Prime Minister Trudeau have said they are close to reaching a NAFTA deal and according to Mexico's Economy Minister, the negotiation team could meet again on Thursday in Washington to start working on their issues again and hopefully move the process forward. The bottom line is that the BoC has less to worry about especially after the uptick in the business sentiment. According to the central bank's own survey of executives, expectations for future sales improved with companies seeing continued signs of healthy sales, capacity constraints and labor pressures. Hopefully this will alleviate one of the BoC's concerns about wage growth.

There are 2 main focuses tomorrow - the Bank of Canada's monetary policy statement and the tone of Governor Poloz's press conference 75 minutes later. While we haven't heard from Governor Poloz in a few weeks, we are looking for optimism all around. Investors are not looking for another rate hike until July at the earliest so if the BoC is less cautious and more optimistic, we should see USD/CAD break 1.2500. However if they maintain cautiousness in the face of improving data, this is a strong indication that they have no immediate plans to raise interest rates and could hold off to the fall depending upon how everything progresses. In this case, profit taking on short USD/CAD positions could drive the pair as high as 1.2700.

The Australian and New Zealand dollars sold off against the greenback following softer Chinese data. Although retail sales in China rose more than expected, first quarter GDP growth slowed to 1.4% from 1.6% QoQ. The year over year rate held steady at 6.8%. Industrial production growth slowed to 6% from 6.2%. The Reserve Bank of Australia's meeting minutes did not have a significant impact on the currency. NZD shrugged off higher dairy prices. No major economic reports are expected from either country this evening.

The pressure on euro and sterling were exacerbated by weaker data. It should be no surprise that investor confidence slumped in the month of April. For the first time since July, German sentiment turned negative and dropped to its lowest level since 2012. The Eurozone index remained positive but still slipped from 13.4 to 1.9. While the Eurozone economy is slowing from elevated levels the consistency of the deterioration is worrying the central bank. Sterling's rally was halted by weaker wage growth. Jobless claims rose less than expected and the unemployment rate fell to a new cyclical low of 4.2% but as we said in yesterday's note, the primary focus were wages. Unfortunately average weekly earnings did not accelerate to 3% like economists hoped but instead held steady at 2.8%. GBP remains in play tomorrow with U.K. CPI scheduled for release. Price pressures are expected to ease and if it does, it would accelerate the losses in GBP/USD. Investors think that the Bank of England will raise interest rates next month but they need to see data validate that view before extending the pair's gains.