- CAD rate cut “buy’s us time”
- Need time for lower oil prices to have impact
- BoC to wait on sidelines
- Higher crude temporarily supporting CAD
Governor Stephen Poloz at the Bank of Canada (BoC) said nothing to upset the market balance in his speech in London this morning. The governor has been criticized by various sections of the market about miscommunicating the bank’s message over the previous two months. In January, he surprised markets by cutting interest rates before shifting to a “neutral” policy stance in a speech in late February. The Street was looking for further clarity in his position.
The loonie is holding steady, within its contained trading range ($1.2410-$1.2510) for the time being, after Poloz reiterated in London the -25 basis points rate cut in January “has bought us some time” to monitor economic developments as the impact from the decline in crude prices works its way through the system. Negative effects from price decline in crude are beginning to appear from Canada’s top export.
He suggested that it would take longer for the positive impact from lower prices to emerge. He did admit, not unlike his colleague and former BoC Governor Mark Carney, that the global recovery remains uneven and fragile while it progresses. This would suggest that the BoC is prepared to wait on the sidelines, see how things work themselves out, before policymakers make their next move on rates. However, market volatility is expected during transition to conventional monetary policy, while forward guidance is best reserved for extraordinary times. Poloz’s speech largely reinforces the idea that the central bank is now very much in data dependent mode, similar to the Federal Reserve, and will be watching oil prices very closely.
The CAD has benefited greatly from last week’s Fed statement, which seems to have put a dovish spin on the Fed’s policy stance. The timing of the Fed’s first rate hike has now been pushed further out the curve, with the market leaning toward a September hike rather than in June. The massive unwinding of long dollar positions across the board has seen the loonie rally from its double top C$1.2800 to this morning’s U.S. dollar low. The overnight rally in West Texas Intermediate crude oil by $3 to $52 a barrel, as the Saudi Arabia leads a 10-nation coalition launching military air strikes on Yemen, has been supporting commodity-sensitive currencies.
Trading the currency pair has been rather choppy of late, mostly within established ranges. The loonie bear has to be worried that USD/CAD has failed to extend the long-term rally through C$1.2800 area. It has now stalled twice atop of this level. The CAD should be retaining its weakening bias due to softer fundamentals, but failing to hold on to new dollar highs (C$1.2417 this morning) will have the ‘weak’ CAD shorts worried. For the time being, the CAD remains at the mercy of the big dollar’s flows and crude oil prices.