Loonieviews-End of Week


"Rate Expectations" raise the Dickens

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Michael O’Neill

Filed in Loonie Views

Canada, Just now 21 March 2014 at 14:47 GMT+0

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· Higher Canadian Data gives loonie a minor boost

· Central Bankers raise the Dickens

· Will Fed speakers provide clarity?

The USDCAD fell to 1.1180 from 1.1240 as today’s higher Canadian inflation data diminished the risk of a rate cut. At the tail end of his press conference following a speech in Halifax on Tuesday, Bank of Canada governor, Stephen Poloz was asked "Can you rule out a rate cut"? He answered "No" and then went on to explain that the BoC was neutral and that interest rates were at the right place within the context of their forecasts. FX traders only heard "No" and USDCAD soared. There has only been a little debate about whether his answer was taken out of context (which it was) so today’s CPI data may help in alleviating some of the negative pressure on the Canadian dollar. Canadian Retail Sales also surpassed expectations rising 1.3 percent in January (y/y) providing additional proof that previous weak data was due to the weather and not a soft economy.

Chart Canadian CPI Canadian Retail Sales

Source: StatsCanada

Out of the frying pan but into the fire.

Today’s CPI data may have served to reduce the odds of a Canadian interest rate cut although it will do nothing to sway the BoC from its dovishly neutral stance. The overall USDCAD sentiment is bullish in part because the Federal Open Market Committee (FOMC) chairwoman, Janet Yellen appeared to have opened the door to US rate hikes earlier than anticipated. The prospect of diverging Canadian and US interest rates in an environment where the Canadian economy is expected to substantially lag US economic growth has emboldened USDCAD bulls. There have also been a number of developments in recent days that individually would be relatively harmless to the currency but collectively add to the negative sentiment. The Finance Minister resigned and even though his replacement is a well qualified and capable individual, he is still an unknown. The Quebec election campaign (Election Day Apr.7) is picking the scab off of the sovereignty referendum wound and may be causing a modicum of uncertainty with international investors in light of Sunday’s Crimean referendum. A strike at Vancouver port, Canada’s busiest has been going on since February 26 and if it continues, it could lead to a sharp deterioration in Canada’s trade balance, according to a BMO Nesbitt Burns senior economist. Canada’s eager participation in US and EU sanctions against Russia could have negative implications for $3.2 billion Bombardier/Russia joint venture. We may not have seen the straw that breaks the donkey’s back, but the load is getting heavier.

USDCAD Technical Outlook

The short term USDCAD technicals are bullish with the uptrend from the beginning of January intact while trading above 1.1060. There is strong support at 1.1140-60 and again at 1.1090-1.1110 guarding the uptrend. Today’s move below the 1.1220-40 support zone combined with a series of lower highs on hourly charts and the magnitude of this week’s move (2.25 percent) suggests that we could see another period of consolidation in a 1.1150-1.1250 range although the bullish USDCAD bias will remain intact. A move above 1.1250 may signal the start of a new leg higher while a move below 1.1120 would mean a more prolonged consolidation phase.

Chart: USDCAD 4 hour

Recap

"Spring has come, but the grass hasn’t riz’, and we’re still wondering where the warm weather is". We may be wondering about the whereabouts of the warm weather but we know it is coming. The same can be said about higher US interest rates-we know they are coming but we don’t know when. Janet Yellen has defined "considerable time" as six months while at the same time warning that the "dot plot" is not the primary way that the FOMC communicates to the public. As was often the case this week, FX traders appear to have only heard part of the message. Together, Poloz and Yellen have written "Rate Expectations" and have raised the dickens throughout financial markets. We may soon know whether Ms. Yellen’s comments were misinterpreted if Messer’s, Bullard, Fisher, Kocherlakota and Stein use their speeches today, to provide clarity.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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