CAD: Pressurized by dovish BoC - BBH

Analysts at BBH explain that the Bank of Canada held policy steady yesterday but the Canadian dollar sold off as the statement was dovish.  

Key Quotes

“A rate hike in Q3 still seems to be the most likely scenario, and by then, some of the uncertainty about NAFTA will likely be lifted.  The overnight rate at 1.25% is half of the lower bound of what the BOC has identified as neutral policy (2.5-3.5%).”

“Potential growth was lifted to 1.8% this year and next from 1.6% estimated in January.  It did slash its Q1 18 growth forecast to 1.3% from its earlier 2.5% projection.  However, for the year as a whole, the growth forecast was shaved only 0.2 percentage points to 2%, while the 2019 growth forecast was lifted to 2.1% from 1.6%.  The Bank of Canada is saying look past Q1 softness, and as demand has picked up, investment has expanded capacity.”

“The US dollar rallied against the Canadian dollar in February and consolidated in March, forming a head and shoulders technical topping pattern, which projects toward CAD1.2475.  The greenback made great strides toward the target, but momentum stalled last week, and our read of the technical indicators warned of a coming bounce.  Even though the US dollar made new lows on Monday, the short-term market seemed vulnerable to some profit-taking.”

“Our target was the CAD1.2640 area and post-BOC, CAD1.2660 was reached.  The close was back below our target, but the technical indicators warn of more near-term upside risk.  It could extend a little above CAD1.2700, but much more than that might call into question the CAD1.2475 target.  Today, the Loonie has traded in very narrow range around the 200-day moving average near $1.2620.”