Yellen and BoC Could Play Havoc With USDCAD

Wednesday promises to be quite an entertaining day for markets, with central banks once again the focus as the Bank of Canada announces its latest monetary policy decision and Federal Reserve Chair Janet Yellen begins her two day testimony, firstly before the House Financial Services Committee.

BoC Seen Raising Rates But Are Markets Expecting Too Much?

The BoC has come to the fore in recent weeks, adopting a far more hawkish stance on interest rates, so much so that markets are now almost fully pricing in a rate hike this year. This comes despite inflation in the country currently sitting well below the central bank’s target and the economy doing quite well – despite a far more upbeat assessment this week from the country’s finance minister Bill Morneau – albeit with a number of potentially destabilising headwinds.

EUR/USD – Euro Hits 14-Month High on US Political Risk

Still, key officials at the central bank have spoken in recent weeks and markets have listened, positioning themselves for a hike and possibly more in the pipeline. Investors have actually taken it on board so much that the downside risks now come from the central bank waiting to hike, an outcome that could hit the Canadian dollar quite hard and cast doubt on just how serious policy makers really are.

BoE Deputy Governor Casts Doubt on UK Rate Hike

The sudden desire to raise interest rates at the BoC comes at the same time as their counterparts at the Bank of England have also struck a more hawkish tone. Despite the significant economic uncertainty linked to Brexit and the weakness we’re already seeing as a result of last year’s vote, there appears to be a growing consensus at the bank to raise interest rates in order to offset the rising inflationary pressures that are largely being driven by the depreciation of the currency.

Inventories Grease Oils Rise as Gold Rallies Again

Still, not everyone is convinced and Deputy Governor Ben Broadbent this morning appears to have joined Governor Mark Carney in stating that it’s not the time to raise interest rates. Broadbent was being seen as the proxy for whether the consensus has shifted and his comments today – which hit the pound in early trade – suggest there may still be some way to go, although future votes are likely to be very close.

USDCAD Could Be Extremely Lively as Yellen Testifies on Monetary Policy

One central bank who’s monetary policy stance has barely shifted this year, if at all, is the Fed. Markets may not yet be convinced that we’ll get a third rate hike this year but they’re not dismissing it as they have in the past, either. Yellen’s testimony on the semi-annual monetary policy report will be watched very closely today for signs that the central bank is pulling back at all from its calls for another hike, amid signs that some policy makers are becoming less convinced due to low inflation.

Yellen will likely be quizzed on a number of issues related to the Fed’s plans – among other things if past testimonies are anything to go by – including its plans for interest rates beyond the end of the year and its balance sheet, which it is expected to begin unwinding as early as September. Yellen likes to keep her cards very close to her chest though so may give little new information away today, not that this often stops markets getting carried away. With her testimony coming at the same time as the BoC’s rate decision and press conference, USDCAD will likely be extremely lively today.

For a look at all of today’s economic events, check out our economic calendar.

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Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam