USD/CAD FOMC Clips Loonie’s Wings

The USD/CAD managed to recover some of the lost ground after the Federal Open Market Committee (FOMC) published its statement. There was no major change in the language from last month’s statement but the American central bank is still leaving an interest rate hike this year. The soft economic data is still seen as being transitory, while the positive indicators continue show a resilient U.S. economy as per the Fed’s statement.

Given the missed GDP advance figures from earlier today the market was expecting a dovish FOMC. While the Federal Reserve did acknowledge a slowdown in the rate of growth, they continue to label it as temporary. The USD/CAD jumped above 1.20 after touching 1.1952 ahead of the FOMC statement release. The reaction from the USD has not been that strong given the weak endorsement from the Fed.

Interest rate divergence lies behind the subdued resurgence of the USD. The Fed is still keeping a June interest rate hike on the table, however unlikely that is, but it serves to keep a September hike as a more likely possibility. June was favoured over July because the earlier Fed meeting does have a press event scheduled after it, just as the September meeting does. Now there are market participants questioning that the Fed could even hike in July, although September still leads the future rate hike polls.

Tomorrow’s Canadian GDP figures could further boost the USD against the CAD if the numbers come in below expectations of a -0.1 percent contraction.

The International Monetary Fund recommended that Canada should maintain its monetary policy to further stimulate its economy. The agency led by Christine Lagarde also added the Canadian housing market is overvalued at 7 to 20 percent contradicting statements made earlier from Bank of Canada Governor Stephen Poloz that there was no “bubble”. The Governor made those remarks even as the BoC published a report on December of 2014 putting the range of 10 to 30 percent of overvalued prices.

The Loonie got an early boost this morning after the GDP figures were released in the US and then it became a waiting game for the FOMC to issue its statement. Commodities were mixed when the GDP figures were released and started to give back some of the gains to the U.S. Dollar.

Unemployment claims on Thursday and the ISM Manufacturing PMI become the next hurdles for the U.S. economy to overcome and prove to the Fed that the economic data justifies an interest rate hike this year.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza