The Bank of Canada (BoC) held rates at 0.75% this morning. The market had already priced in the lack of action from the BoC. The central bank also published its quarterly monetary policy review. Given the no rate change expectations the monetary policy report became more scrutinized to gleam some insights into future BoC interventions. Governor Stephen Poloz faced the press and again he reiterated that he anticipates the negative effect of lower oil prices being transitory. The Governor is optimistic that the latter part of the year will be one of recovery as stronger exporters come in boosted by a weaker loonie.
The USD/CAD continues on a downward trend that started yesterday with the release of the U.S. retail sales figures. Although the number was higher than last month’s if failed to beat expectations and confirms the slow down of the U.S. economy. Today it was the American industrial production and manufacturing index that came in lower than forecast. The struggling U.S. dollar was no match for the CAD after the central bank held rates. when it was trading at 1.2550 The pair lost two cents after the announcement and is currently trading at 1.2262.
The best way to describe Governor Poloz’s tone is neutral. He did not give an impersonate and bullish boost to the Canadian currency, but he did not make a repeat of his dovish ‘atrocious’ comments. He seemed optimistic about the future of the Canadian economy, while realistic about the current headwinds it is facing.
The BOC did raise its inflation forecast on the fact that a cheaper CAD will put some inflationary pressure via imports. The recovery in the second half of the year will be lead by the non-energy sector which are sensitive to the price of the currency to boost their exports. Overall the quarterly monetary report was bullish on the Canadian economy, which as mentioned before:
The majority of economists and analysts are not expecting a rate cut but their focus will be on the quarterly Monetary Policy Report from the BOC. Depending on the optimism of that report the sooner we can see a rate cut if the Canadian economy starts to underperform. On the other hand a pessimistic report could give the Bank of Canada flexibility on when to cut, or even if the economy does grow the central bank can even decide not to do it at all. The loonie will be affected by the eventual optimistic versus pessimistic forecasts of the central bank.
The expectations are now pricing a data dependant Bank of Canada cutting rates if the economic indicators continue to slide. Oil prices have begun to stabilize with inventories slowing down their buildups. The Iran nuclear deal is still hanging over crude as it could send it screaming lower if the nation is allowed to sell more of its oil production. The OPEC continues to produce at record levels with the goal of increasing the lost marketshare in the pre-glut days. The Bank of Canada sees oil recovering next year, but at this point it is to early to say.
The rest of the week will feature Federal Reserve members commenting on the potential benchmark interest rate in June which could boost the U.S. dollar, but there are few economic indicators that could drive the currency in the remaining two days of the week. Unemployment claims and the Philadelphia manufacturing index will be taken into consideration, but given how the former can only validate the strength of the job market recovery, and the expectations around manufacturing are lower the impact of their releases will be limited.
Canada will have to wait for the inflation data on Friday to have a counter argument to what Fed Members and the market have in mind for the USD. Canadian CPI will be released at 8:30 am EDT on Friday.