The Loonie hit a six year record for one day gains yesterday (2 percent gain) after the U.S. Federal Reserve statement was announced. The anticipated removal of the word “patient” came to pass, but it was not the only update as the American central bank downgraded forecasts for growth and inflation. A hawkish Federal Reserve in dove’s clothing confused the market and triggered a sell-off of USD across the board. USD/CAD closed the Wednesday trading session at 1.2570 and is now trading around the 1.2732/50 range.
Institutional and retail traders alike were caught wrong footed and speculators took advantage of the scramble and low liquidity to push USD lower. This is one of the unexpected side effects of the Fed moving away from a transparent forward guidance. Chair Yellen quipped that “Just because we removed the word patient from our statement doesn’t mean we’re going to be impatient.” Volatility is back in the markets as the U.S. Central bank continues to move away from forward guidance . Even though the Fed will set expectations on upcoming decisions, the market’s expectations and the Fed’s final statement might diverge creating uncertainty leading up to and after the release.
Fundamentals returned to the driver seat this morning as all pairs have begun giving back post-FOMC gains. The Canadian economy continues to struggle after disappointing data and lower commodity prices holding growth back. The Bank of Canada has been proactive and interest cut rates ahead of expectations. The reactions to the FOMC removal of “patient” were short lived and the Canadian dollar heads lower which will give exporters a competitive advantage going forward.
The monetary policies of the Canadian and American central banks are on the opposite sides of the spectrum and that will continue to drive the CAD lower as the currency fails to get any traction from lower commodity prices. Macroeconomic headwinds from Europe and Asia can also limit the upside of a weaker currency.
Pivot Points USD/CAD High: 1.2727 Low: 1.2702