USD/CAD – Loonie Mixed After Bank of Canada Keeps Rate on Hold

The Bank of Canada (BoC) as expected kept the benchmark interest rate on hold at 0.50 percent earlier today. The central bank upgraded the GDP growth forecast to 1.7 percent from 1.4 percent. Overall the statement and press conference by Governor Stephen Poloz was optimistic about Canadian growth picking up, but pointing out the factors that could derail it. In a global economy that is best described as fragile the Canadian dollar has newfound support from oil price stability and U.S. based demand.

The International Monetary Fund  (IMF) had cut the growth forecast yesterday to 1.5 percent from 1.7 percent in 2016. The downgrade case as no surprise as the IMF was updating its forecasts from January and Canadian growth factors had not yet fully trended upwards. The weak loonie has given exports a shot in the arm wth the service sector enjoyed a recovery that boosted job creation in March. Now the question as the loonie appreciates if the Canadian economy will stay the course even as energy prices stabilize and U.S. demand growth estimates are mixed.

It was a disappointing day for US releases. Core Retail Sales improved to 0.2%, but fell short of the forecast of 0.4%. Retail Sales surprised with a decline of 0.3%, shy of the estimate of a 0.1% gain. It marked the second straight drop for the indicator. Consumer spending represents the biggest part of the economy, so these figures could spell trouble at a time that the export sector remains soft due to weak global demand. PPI, a key gauge of inflation in the manufacturing sector, continues to struggle, posting a third decline in four months. The index dipped 0.1%, well off the estimate of a 0.3% gain. Will we see some relief from CPI on Thursday? The Fed, which has sent out a decidedly dovish message about the US economy, has greatly lowered expectations about a rate hike in April, and if CPI disappoints, the likelihood of a June move will decrease.

 

The USD/CAD appreciated 0.28 percent in the last 24 hours. The CAD could not build on the gains from Tuesday and the neutral tone from the BoC did not make a strong case for the loonie. Governor Poloz declared the oil price has been a leading driver of CAD moves. The Canadian dollar has registered a high correlation with the price of oil, but even so the comments from Governor Poloz warning about the effects of a strong CAD had more sway with the market. The USD/CAD remained below 1.28 overnight and is now trading at 1.2808 after touching lows of 1.2750 at midnight EDT.

 

Oil has been a volatile with Brent losing 0.50 percent and WTI gaining 0.126 percent in the last 24 hours. The Doha summit is only promising to freeze output at record high levels and that is even if its signed. Saudi Arabia has issued doubts about reaching an agreement if there are holdouts such as Iran who has said it won’t freeze until it ramps up to its pre-sanction levels. The Saudis have said that they won’t cut production and with lower global demand the oil is awash in black stuff putting further pressure on prices.

 

OANDA MarketPulse Kenny Fisher wrote earlier:

US crude prices surged 10 percent last week and the upward move has continued, as crude prices are close to the $42 level. Crude oil prices have held steady on Wednesday, despite an EIA crude inventory report which showed a surplus of 6.6 million, crushing the surplus of 0.9 million barrels. This reading contrasted sharply with the previous release, which showed a strong decline. Moving to the international oil markets, oil producers will meet for an important meeting in Doha on Sunday. Participants at the Doha gathering will be looking to cap production limits and curb the huge worldwide glut of oil. However, previous attempts to reach an agreement to cut production have failed. With many producers, including Iran, interested in ratcheting up production to increase oil revenues, it’s questionable whether we will see any dramatic breakthroughs at the Doha meeting.

The U.S. Inflation gauge the consumer price index (CPI) will be published tomorrow at 8:30 am EDT. The index is estimated to combine at 0.2 percent for the core reading, slowing down from the previous two months of 0.3 percent growth in inflation. The slow pace of inflationary pressure is a concern for certain members of the Fed that have discounted the central bank will act if inflation remains so far from the 2 percent target. The counter argument from other Fed members is that the risk of letting the economy “run hot” with inflation is too low and could be easily remedied with monetary policy, as opposed as correctly anticipating it.

The CAD will be following the releases of U.S. fundamentals and oil price action after a Bank of Canada appearance that while optimistic, was not fully committed to a dovish stance.

CAD events to watch this week:

Thursday, April 14
8:30am USD CPI m/m
8:30am USD Core CPI m/m
8:30am USD Unemployment Claims
10:00pm CNY GDP q/y
10:00pm CNY Industrial Production y/y
Friday, April 15
8:30am CAD Manufacturing Sales m/m
10:00am USD Prelim UoM Consumer Sentiment

 

*All times EDT