USD/CAD – Loonie Higher After Dovish FOMC Minutes

The Canadian dollar advanced versus the USD as the minutes from the March Federal Open Market Committee (FOMC) meeting added yet more dovish rhetoric to U.S. rate hike expectations. The interest rate divergence that had fueled the dollar rally has been put on pause after the Fed has gone from strong hints of rate hike moves in December back to a noncommittal stance in 2016.

Canadian data was negative with the Ivey Purchasing Managers Index (PMI) coming in below forecasts at 50.1 barely above the expansion level. The loonie reacted after the PMI, but got a chance to recover after the USD weakness. Yesterday’s release of the Canadian Trade at $1.9 billion deficit was almost three times from last month’s figures. Imports declined 2.6 percent, but in a negative note Exports fell 5.4 percent after a record high $43.7 billion in February. The anticipation surrounding the FOMC minutes meant the CAD was exempt from the negative effect of the economic indicators with oil also rebounding and giving more support to the CAD.

The Fed minutes released today show the two sides of the U.S. central bank are growing further apart on their internal comments, while the vote count remains mostly behind Chair Yellen. There are differing forecasts and expectation from FOMC members and some see current headwinds dispersing in the short term, while for other the impact on U.S. growth will be longer term. The lack of clear consensus on risk assessments means that the April FOMC will not feature a rate increase as the data in the last two weeks has not built a confident argument for either side. Strong U.S. non farm payrolls (NFP) has been cancelled by low inflation numbers with little sign consumer demand will make a strong showing.

The USD/CAD lost 0.45 percent in the last 24 hours. The pair is trading at 1.3095 after a volatile day with negative economic releases punishing the CAD, only for the dovish FOMC minutes to put that in the rearview mirror while pushing the USD down. Oil had a big day with 5 percent gains for West Texas and 4.86 for Brent. Energy prices boosted commodity currencies after a surprise drop in U.S. inventories (-4.9 million barrels) and increased demand at refineries.

Oil has been a volatile trade after Organization of the Petroleum Exporting Countries (OPEC) members have issued statements supporting the Doha Oil Output Freeze Summit. Kuwait was the latest to say Iran’s participation is not a deal breaker, but the comments of Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman who said if Iran did not agree to a freeze output, it would pull out of the deal. Iran has made major deals to supply India with oil and has increased shipments to the emerging nation in hopes to match its pre-sanction output.

Tomorrow the market will turn to Fed Chair Janet Yellen’s speech that is expected to keep the dovish rhetoric in place regarding future rate hikes. FOMC member and interest rate hold dissenter Esther George will also give a speech in Nebraska on Thursday night that will act as a counter point to Yellen’s comments.

USD/CAD events to watch this week:

Thursday, April 7
8:30am USD Unemployment Claims
5:30pm USD Fed Chair Yellen Speaks
Friday, April 8
8:30am CAD Employment Change
8:30am CAD Unemployment Rate

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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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