The Canadian dollar was caught in the middle of a huge market shift this morning. The European Central Bank (ECB) learnt a lesson from the December meeting communication failure and over delivered on market expectations. The central bank cut several rates with the deposit rate now at –0.4 percent, a 20 billion euros expansion to its quantitative easing (QE) program that is now 80 billion euros a month, the inclusion of non-corporate bonds as assets available for purchase and a Targeted Longer-Term Refinancing Operations TLTRO II. The statement made waves across the forex market depreciating the EUR. In a sharp twist as soon as ECB President Mario Draghi started giving his press conference to give further details on the bazooka he just blasted it all went topsy turvy.
After delivering a kitchen sink approach Mr. Draghi felt confident to mention that negative rates had an inevitable floor and dismissed the two tiered deposit rate system. Taken out of context the comments are fair and have sound logic given Mr. Draghi’s bazooka was still warm, so he felt no need to fire again so soon. The December communication failure was the result of the ECB under delivering after over promising and now in March the central bank found itself over delivering and under promising with a similar outcome.
The volatility in the market made major pairs spin and for the loonie the biggest impact came as the Oil Freeze Output Summit rumoured to take place in Moscow on March 20 is off the table. The price of oil dropped and dragged the CAD down with it as global demand is weak with record high production levels that show no sign of slowing down.
The USD gained 1.03 percent against the CAD in the last 24 hours. The pair is back trading above 1.33 and threatening the 1.34 price level after the drop in Brent and West Texas prices. The gains following the Bank of Canada (BoC) decision to hold rates and mixed but somewhat net positive outlook on the economy added to the jump in oil prices have not all eroded.
The market reaction to the ECB rate cut validates the decision by the Canadian central bank to hold and partner with the government to use fiscal stimulus as the effects of monetary policy appear to be severely diminished as trust in central banks ebbs even lower.
Canadian data was mixed on Thursday. The New House Pricing Index recorded a 0.2 percent rise in January. Vancouver and Souther Ontario were the main drivers of growth. Canadian Housing has risen 1.8 percent on a 12 month basis. Real estate prices are a concern for the Government and the BoC as low rates have triggered higher levels of debt. Several raring agencies and economic bodies have warned about the possible housing bubble in Canada.
The decline in the price of energy hit Canada’s Industrial Utilization rate as it fell again in the fourth quarter. Canadian Industries operated at 81.1 percent in Q4 lower than the expected 81.7 percent.
Canadian employment will close the week for the CAD. Canada is expected to add 10,000 new jobs after the loss of 5,000 in January. Forecasting Canadian job numbers has been tough as readings have been erratic with huge swings on both sides on a monthly basis. Canadian Prime Minister Justin Trudeau continues his official visit to the U.S. and any positive news will help to solidify the loonie as it flies in a stormy FX weather.
CAD events to watch this week:
Friday, March 11
8:30 am CAD Employment Change
*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar