USD/CAD – Loonie Head Fake Hurts Bears and Threatens Dollar Low

The BoC held rates as expected this morning. Governor Poloz sees oil price shock dissipating and repeated that the oil impact was more front-loaded and that it would not be larger.

As the oil shock wears off, the Governor anticipates stronger exports, greater investments and more jobs. Nevertheless, despite the optimism, the BoC did lower growth estimates for this year to +1.9% from +2.1%.

On the flip side, the BoC anticipates higher inflation than previously expected and it says it’s partly due to the weaker C$ that’s translating into higher import prices. The year-over-year change in headline CPI on a quarterly basis was revised upward across the board, and that the core would remain at +2% or higher through 2017. The BoC estimates the impact of a weaker loonie has contributed +0.7% to CPI, versus the drop in oil prices, which has pushed CPI down by roughly -1.3%.

There was a sliver of hope amongst the CAD bears that the Governor would surprise and possible ease again. The USD bulls were primed and ready to go higher just before the BoC announcement (CAD$1.2557). However, since the BoC kept its overnight rate at +0.75% as expected and indicated it believes the negative economic effects of lower oil prices will not be more severe had the loonie doing a hard U-turn and is now considering taking on this years dollar low (CAD$1.2360 – dollar break out after the surprise BoC cut on January 21).

The optimistic policy statement and a firming in crude prices have USD/CAD on wheels this morning. Up until now, the loonie has been trading in a relatively contained range for the past three-months (CAD$1.2384-$1.2794). The market needs to break either side with momentum for any new directional bias.

No Slight of Hand From Draghi

The highlight of today’s ECB press conference was the look of horror on Draghi’s face when confronted with a surprise visit from a female protestor. Everything else went according to plan, rates were held steady, Draghi dispelled any concerns about the lack of QE product and he seems to have managed to squash the rumor of QE possibly ending early. More importantly he seems confident about the bank’s capacity to buy bonds at the target pace of +€60b per month and said concerns over scarcity were a “little exaggerated” and “premature”. Despite any immediate policy changes looking unlikely, the market tentatively believes that the ECB could be forced to adjust quantitative easing modalities in H2.

The EUR experienced a short squeeze towards €1.0650, near the mid-point of the recent contained range, on a number of factors. Draghi noted that the EUR exchange rate was not a policy target. Also aiding the currency’s temporary flight were the below forecast U.S Capacity utilization and Industrial Production headline print and a note to “not” lowering the ECB’s depo rate further. The market ran into good offers once again topside (€1.0660) keeping intact key resistance just north of €1.07. Through here breaks open the door to €1.0775-90 level rather quickly.

Disappointing U.S. data has the fixed-income market recalibrating the timing of the Federal Reserve’s rate hike — the majority thinks September is when it will happen. Not helping the dollar was the International Monetary Fund trimming its growth expectations for the U.S., and upgrading its forecast for the eurozone.

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.