USD/CAD – Loonie Soars After Dovish FOMC

The United States Federal Reserve removed the “patient” language from its statement, but far from that being a sign of an impending hawkish policy move further comments around lower inflation and wages triggered a sell off of the USD across the board.

The loonie was able to overcome negative whole sales trade data and six year lows on the price of oil after which the currency pair touched lows versus the USD (1.2835). Post FOMC the CAD was able to reverse earlier loses and continues to trade in a 1.2575-85 range. The comments from the Fed Chair, statement and projections pushed the USD into negative territory even though a June rate hike is still a strong possibility.

The signals from the U.S. were mixed as on one hand the removal of the word “patient” makes the case for a June rate hike, even though Chair Janet Yellen has mentioned on various occasions that removing it does not mean an automatic rate hike in a couple of meetings although that decision is still on the table. On the other hand the central bank highlighted that growth seems to be slowing down citing housing and consumption as examples, along with the risks of low inflation and wages that make the case for holding the rate at record lows.

“Just because we removed the word patient from the statement doesn’t mean we are going to be impatient,” Chair Janet Yellen said in what seems to be a compromise to solve the dilemma the Fed finds itself in. Making the case for a June interest rate hike, but raising rates on a slower pace after the first hike. The end of forward guidance will mean a rise in volatility as market watchers will have no insight on what the central bank will be announcing at each meeting. Record low U.S. interest rates appear to be on their way out, but macro economic conditions will probably keep them on near historic lows.

The fundamentals factors of the Canadian economy along the lower price of energy kept battering the loonie when compared to the U.S. The doubts raised by the Fed have reversed some of those gains but with a June rate hike still on the agenda (September a strong second choice) interest rate divergence will still pressure the loonie lower versus the U.S. dollar as the Bank of Canada still has some room to cut rates if needed to boost economic growth.

Update: The USD/CAD – Loonie is back to Reality post details the quick retracement of the CAD

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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 has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. 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