The BoC sings “Oops, I did it again”

The BoC sings: ‘Oops, I did it again’

Michael O’Neill Michael O'Neill
FX Consultant / IFXA Ltd

  • Traders are digesting Yellen’s remarks – decision still pending
  • Bank of Canada pulls u-turn
  • Loonie will remain choppy within broad range

By Michael O’Neill

We all live in a Yellen submarine

Well, we might not all live in a Yellen submarine, but US dollar bulls sure do and their hopes for rate hike clarity from the yesterday’s Congressional testimony weren’t sunk, but they were submerged.

Yellen’s speech was rather positive, noting improvements in the unemployment rate, a decline in long-term unemployment and gains in domestic spending and production. She noted the decline in long-term rates blaming it in part, on disappointing foreign growth and the drop in oil prices.

If anything, the speech wasn’t any less hawkish than the previous FOMC statement. However, many traders seemed to be expecting a declaration that June was FOMC Rate Hike month and were disappointed when that didn’t occur.

Sing a long with Stephen

Bank of Canada governor, Stephen Poloz is humming a familiar tune this morning. It’s “oops, I did it again” by Brittany Spears and he did it again, yesterday, in a speech in London, Ontario.

A month ago, the esteemed governor, blind-sided markets with the announcement of a 0.25% cut in interest rates, blaming falling oil prices for the move as they were “unambiguously negative for the Canadian economy”. The Canadian dollar lost nearly three cents in a day and nearly 8 cents in a week.

On Tuesday, he did it again. Apparently, the rate cut wasn’t because the oil drop was “unambiguously negative for the Canadian economy” but merely “insurance” to guard against lower inflation and financial instability. The bank cut rates to “buy time” to assess the economic impact. The impact on USDCAD was immediate. It has collapsed from 1.2640 to 1.2404 this morning and is currently sitting at 1.2440.

Polozfuscation is policy dissemination through obfuscation

The BoC made a deliberate decision to retreat from providing forward guidance to the markets, last fall, replaced by Polozfuscation.

Polozfuscation can be defined as central bank obfuscation using “known unknowns” as tangible, quantifiable data to formulate policy while considering the effects of changes to the flexible inflation targeting regime and possible side effects on policy credibility.

Yup, that doesn’t make sense in any language except for that spoken at 234 Laurier Avenue West, Ottawa, Canada.

v Bank of Canada has thrown another curve ball at the markets. Photo: istock

BoC credibility being tested

The steep drop in USDCAD over the past day is a direct result of Canada rate cut bets being unwound ahead of Tuesday’s decision. What seemed like a certainty just a last week is now a “known unknown”’. Other unknowns include whether Poloz’s “insurance policy” provided sufficient coverage in the event of lower oil prices before March 4, or whether he will respond to a soft CPI print on Thursday. The new BoC mantra may be "surprise-got you again"!

“No pipeline for you”

The lame duck US president is proving not to be so lame. President Obama did as promised and vetoed the Republican bill approving the Keystone XL pipeline. That decision may come back to haunt him later on this year if the Republicans attach language to approve the pipeline, to other legislation. Put that in your pipeline and smoke it. USDCAD didn’t react to the news as it was widely expected.

USDCAD Fundamentals

Tuesday’s BoC interest rate decision may prove to be anti-climactic following yesterday’s Poloz speech. The rate cut that was widely expected appears to be off the table at least until April 15, leaving a month and a half worth of data to set the tone.

WTI oil prices are the wild card. The short-term downtrend remains intact below $51.20 while a break above $54.50 would argue for further gains while suggesting that a short-term floor is in place. The debate as to whether the price drop has curtailed the oversupply situation has not been resolved.

USDCAD continues to be vulnerable to expectations of a rate hike in the US. Yesterday, Janet Yellen’s speech was thought to be on the dovish side which may only be due to the elevated expectations that she would preannounce a June rate hike. If US data continues to come out strong the risk of a rate hike increases and USDCAD will move higher.

Intraday, USDCAD is vulnerable to further losses stemming from the unwinding of stale long dollar positions combined with the risk of month end portfolio rebalancing leading to US dollar selling.

USDCAD technicals home on the range, once again

The intraday USDCAD technicals turned bearish with the breaks of both 1.2540 and 1.2490. The move below support at 1.2440 suggests that 1.2540 will serve as a short-term cap, while targeting additional support in the 1.2340-60 area.

The short-term technical story is one of the Loonie being home on the range. USDCAD has traded within a 1.2340-1.2780 band since January 22, managing to look bid near the top and offered near the bottom. That is likely due to WTI oil prices in the $45.00/bbl and the prospect of another BoC rate cut being fully priced in. If so, it makes sense to buy USDCAD around 1.2380, with a stop below 1.2310 and to sell USDCAD near 1.2760 with a stop above 1.2820

USDCAD 4-hour with trading band highlighted
usdcadSource: Saxo Bank

– Edited by Oliver Morrison

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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