USD/CAD Bank of Canada Expected to Hold as Employment and Oil Improves

The Bank of Canada Governor Stephen Poloz has called the effect of lower oil prices “atrocious” to the Canadian economy. On Friday the employment figures were positive with a 28,700 jobs added to the economy and the unemployment rate avoided inching upwards and held at 6.8%. The USD/CAD depreciated after the employment figures were released and the pair is trading at the 1.26 price level. Next week Governor Poloz will make a decision on benchmark interest rates that could further depreciated the loonie if he decides to cut rates like he did in January.

Even if the BOC does not cut in April the market is expected rates to be lower by the end of 2015. The good news is that the price of oil has stabilized, but this might be the calm before the storm if Iran finally reaches a deal that see its oil exports sanctions reduced flooding the market and driving the price even lower. The Bank of Canada can afford to wait as there is major uncertainty on where energy prices will be in a month’s time. Central bank action will be needed, but Poloz is more concerned with the timing and after surprising the market with anticipated action, might wait until the data makes it unavoidable. This is the reason some economist see no change for the rest of the year, and the first rate move could be a hike in 2016.

Energy exports will continue to decrease as the price of crude is still under pressure from a supply glut. There are reasons for optimism as non-energy exports have increased, and should be further supported by a lower loonie.

The Bank of Canada Governor Stephen Poloz has mentioned that the surprise rate cut in January was a pre-emptive move to avoid a further slowdown. If the trade balance continues to show the Canadian economy is losing traction it could put pressure on the central bank to cut rates again. The interest rate differential favours the USD as the expectation is for the Federal Reserve to hike the benchmark interest rate as early as June, but more likely in its September meeting.

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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