ECB to Tout QE Success and BoC Expected Dovish


The European Central Bank (ECB) and the Bank of Canada (BoC) will capture the forex market spotlight tomorrow as they announce their respective benchmark rates.

The market is not expecting the ECB to change its rate and the focus will be on President Mario Draghi’s press conference. With the BoC, on the other hand, there is a small possibility of a rate cut. The oil market has stabilized and the Canadian job market has improved giving the central bank some latitude. The BoC will also publish its quarterly monetary policy report. The forecasts for the Canadian economy will be important to watch as they can give traders some idea of what kind of outlook the central bank is assuming and the possible scenarios for the benchmark rate.

The USD was derailed by a weaker-than-expected retail sales number earlier in the trading session. The warm weather helped improved the indicator with a 0.9% gain but expectations were for a 1.1% sales rise. Given the fact that oil prices are lower and American employment is surging, economists were expecting that extra disposable income would boost commerce. Instead it seems consumers are saving or paying down debt.

The EUR/USD was trading at 1.0560 when the U.S. retail sales numbers were announced. In the aftermath, the USD rapidly depreciated and is trading at 1.07. In the U.S., consumer spending accounts for more than two thirds of economic output.


ECB Expected to Hold Rates Steady

The ECB will publish its benchmark interest rate tomorrow with no change expected. After unleashing its quantitative easing (QE) program, the ECB will focus on touting the facts that prove the QE launch has been a success. Draghi’s words could further boost the USD versus the EUR as interest rate divergence continues to drive the forex market. A Reuters poll of economists showed consensus favored a positive impact from the ECB’s QE measures. The announcement and launch of the trillion-euro program has depreciated the currency, and lowered bond yields in the European Union. The challenge remains in how to turn that liquidity into a productive force for growth.

Draghi will continue to be optimistic about European growth, and this time the data backs him up. Inflation has improved as per the latest consumer-price index flash estimate (-0.1% versus -0.3%). European manufacturing continues to expand as per the purchasing managers’ index readings released on March 24. Next week, the advanced estimates for manufacturing in Europe will be released, and that data should give further insight into the state of European factories.

BoC Governor Could Order a Rate Cut

BoC Governor Stephen Poloz has described the effects of lower oil prices as ‘atrocious’ for the Canadian economy. On Friday, Canadian employment figures were positive with 28,700 jobs added to the economy, and the unemployment rate held steady at 6.8%. The USD/CAD depreciated after the employment figures were released and the pair is trading at the 1.26 price level. Poloz will make a decision on benchmark interest rates soon that could further depreciate 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 expecting 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, particularly if Iran finally reaches a deal that see its oil export sanctions reduced, in turn flooding the market and driving the price even lower. The BoC 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, he might wait until the data makes it unavoidable. This is the reason some economists 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. But there is reason to be optimistic as non-energy exports have increased, and should be further supported by a lower loonie.

Poloz 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 it’s more likely to happen at its September meeting.

The USD/CAD was trading at 1.2583 when the U.S. retail sales numbers were released before plunging to 1.2468 where it is trading currently. If the BoC holds the rate, the USD could retreat further as the retail sales disappointment also affected the market perception around a June rate hike by the Fed.

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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