USD/CAD Bank of Canada Holds Awaits Fiscal Stimulus

The Bank of Canada (BoC) held the benchmark interest rate at 0.50 percent in the first policy meeting of the year. The market expectations for a rate cut had accelerated given the rapid decline of oil prices and the weakness of global stock markets. The Canadian dollar had followed the price of oil on a downward move and it was speculated that the BoC could cut rates to get ahead of the market. The Canadian government on Tuesday had given no details on the first budget of the Liberal government putting the spotlight squarely on the central bank. BoC Governor Stephen Poloz returned the favor as he specifically mentioned that the bank will await the fiscal boost before it intervenes to further stabilize the Canadian economy.

The announcement of a lack of rate change managed to reverse the upwards trend of the USD/CAD that was on its way to break above 1.4690 and ended up trading below the 1.45 price level after the speech of Governor Poloz and a recovery of oil prices. West Texas oil had another volatile day as concerns about oversupply remain. The price fell below $26.70 prompting commodity currencies to tumble, but it managed to recover to near $28. In the last 24 hours oil still was 1.89 percent lower, with no signs of potential price stability out of the Organization of the Petroleum Exporting Countries (OPEC) members or U.S. shale producers.

The USD/CAD fell 0.51 percent as the Canadian dollar appreciated thanks to the rhetoric of the Bank of Canada. The market’s focus is now on the March budget to be delivered by the Liberal government. The campaign that won them the election stressed investment that would boost growth but put Canada on a deficit. As it turns out the Conservative government was already at a deficit, so its just a question of how much stimulus does Prime Minister Trudeau is willing to inject to help Canada withstand the heavy headwinds it faces. Governor Poloz said that the BoC was considering a rate cut, but will also be awaiting the effect of fiscal policy before committing to another rate cut.

USD/CAD Technical

S3 S2 S1 R1 R2 R3
1.4439 1.4468 1.4485 1.4531 1.4560 1.4577

Canada continues to be close to a recession and the central bank opted to wait as market conditions deteriorated too quickly to evaluate if the factors are permanent or temporary. The BoC has a limited runway of cuts it can make, and although it has hinted at unconventional policies it is awaiting the unveiling of the Government’s fiscal package which could be quite significant.

The Bank of Canada reduced growth forecasts for 2016 from 2 percent down to 1.4 percent given the rout in commodity prices and the failure of exporting industries to increase output to offset the losses. The central bank does remain optimistic in the long term as the 2017 forecast was only downgrades slightly from 2.5 percent o 2.4 percent.

CAD events to watch this week:

Friday, January 22
8:30am CAD Core CPI m/m

*All times EST
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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