The trend in USD/CAD has been quite dull since last month Fed meeting. The pair has remained within the range of 1.35 – 1.34 (+0.40% month-to-date) despite acceleration in trade war headlines. Yet the trend is about to change as today’s Bank of Canada monetary policy meeting, although not showing major changes in forward guidance, should benefit the greenback. The cautious wording of the BoC's statement regarding the trade dispute between the United States and China and the risks to economic growth are the main factors.
Since its 24 April 2019 meeting, the BoC has been following the Fed’s footsteps, removing the prospect of a potential rate hike and emphasizing a more accommodative policy stance instead while lowering its growth forecast from 1.70% to 1.20%. Furthermore, the drop in April manufacturing PMI to contraction territory at 49.7 (prior: 50.5), lowest since February 2016, due to softer client demand, does not bode well for the oil currency if the trade situation worsens. For now, it seems that inflation is maintained in the 1-3% target range, with core and headline April CPI given at 1.80% and 2% and is therefore not an issue for the BoC. In addition, considering the recent development of talks with the US, it seems that concerns over trade discords are addressed as the US is willing to lift tariffs on both Canadian and Mexican steel and aluminum exports, paving the way towards ratification of a new USMCA deal. We would however remain cautious, as downside risks on loonie are rising.
USD/CAD is trading at 1.3505, approaching 1.3521 short-term.
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