USD/CAD Trades Above 1.2450 After BoC Statement

The USD/CAD continues to climb higher as the USD rally keeps gathering momentum. The week started with a holiday for the U.S. and parts of Europe that resulted in thin volume. Yesterday with all markets online the USD started where it left off on Friday. Federal Reserve Chair Janet Yellen’s comments continued to boost the USD that benefited from European uncertainty on the Greek debt front. The Bank of Canada rate statement was never intended to defend the CAD’s position as all forecasts called for the interest rate to remain unchanged at 0.75 percent.

The Bank of Canada did just that. The BoC made change to monetary policy and an optimistic statement regarding the economy. Risks to the Canadian economy are elevated according but the central bank is ready to act if they pose a bigger threat. The BoC is happy with current retail sales figures and inflation is on the lower end of their target, which means their monetary policy is appropriate.

The USD/CAD made another attempt at breaking the 1.25 price level only to be contained as options could be triggered if that level is touched. USD strength will continue until more economic data is released that could deflate the big dollar. Friday’s second gross domestic product release for the first quarter of 2015 could have that effect. The market is already pricing a huge disappointment that has been caused by “transitory” factors is the Federal Reserve is reading the economy right. The GDP figure on Friday is estimated to validate the underwhelming performance of the first quarter, but any surprise could have an impact to the USD/CAD as Canada will release its monthly GDP data.

The Bank of Canada statement was fairly neutral to the loonie in a week where the Canadian economy will have limited opportunities to convince the market one way or the other. The central bank put most of the negative onus on outside factors such as the weak growth of the U.S. in the first quarter. The strength of the loonie due to higher energy prices was mentioned briefly but the topic of crude did not get further ink from the BoC.

Oil has fallen of its perch in the last month as demand has been steady and production is still at record high. Black gold has proven to be for the most part disconnected from military turmoil and it seems the rally in crude was boosted by paper barrels rather than real ones. The rise of the USD has given crude no way to go but down. Lower crude prices will pressure the CAD further down as well, which is something that is needed for the export led recovery expected by the Bank of Canada.

The market is awaiting further evidence that there is truth to the BoC’s optimistic forecast on the Canadian economy. An interest rate cut could still be needed towards the end of the year in order to stimulate the economy which would drive the loonie even lower versus the USD.

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