BoC says: ‘We don’t know, do you?’ 20May15

BoC says: ‘We don’t know, do you?’

Michael O’Neill

FX Consultant / IFXA Ltd


  • Don’t bet on hawkish FOMC minutes
  • BoC is uncertain, shouldn’t you be as well?
  • USDCAD downtrend is still intact

By Michael O’Neill

The Federal Open Market Committee minutes will be released in a few hours. There is a school of thought suggesting a risk that the minutes will be viewed as hawkish. The rationale is that the discussions about the outlook for inflation and growth could provide a better sense of timing for lift-off. This has helped to sustain the US dollar’s recent bid tone this week.

The April 30 statement delivered what the market expected – a dovish statement reiterating that rate decisions will be data dependent. To believe that the FOMC deliberations implied a different message than what was contained in the statement is akin to believing in a politician at election time.

The only certainty is uncertainty

The Bank of Canada’s governor, Stephen Poloz, in a speech to the Charlottetown, PEI, Chamber of Commerce, declared:

“new companies tend to be more productive than companies that have gone out of business”

The Wizard of pol-OZ came out from behind the Ottawa curtain to deliver a speech entitled “The Way Home”. A more accurate title would have been “I don’t know, do you”?

His speech was peppered with references to uncertainty:

  • “The implications for income and investment, and the adjustments they’re causing across sectors and regions, may take years to work themselves out.
  • "Of course, I must underscore how uncertain the outlook is."
  • “All of this has certainly made it more challenging to distinguish the trend from the temporary.

Despite all his worries of uncertainty, Poloz reiterated the BoC’s view that growth will rebound partially in Q2. However, since he did not quantify “partially”, what is he really saying? Q1 GDP growth is forecast to be 0.0%, so would a Q2 number of 0.5% allow the BoC to say they nailed the forecast?

The Bank remains concerned about inflation and still expects inflation to be a sustainable 2% by the end of 2016 although that number is probably worthless, considering that he went to great lengths to hedge his forecast.

According to Poloz: "Inflation is a noisy indicator. All sorts of things can affect it on a month-to-month basis. Our task of judging the underlying trend of inflation has been complicated by the events of the past year. We have the oil price shock, which is pushing inflation down, and the weaker Canadian dollar, which is pushing inflation upward. On top of these, a number of one-off factors have been affecting inflation."

Canada CPI

Source: Stats Canada

Despite all this uncertainty, Poloz says that the positive forces already identified will “dominate the picture and have us back on track to reach full capacity around the end of 2016.”

Is that statement meant to appease the Ottawa mandarins who may have resented his prior depiction of Q1 GDP as “atrocious”, especially in an election year?

He closed his speech by stating that “By being transparent about the signs we’re watching, we are trying to help financial markets make their own judgments about the economy’s prospects,” What he was really saying to financial markets was “your guess is as good as mine”.

USDCAD outlook

Traders won’t get much insight into the domestic economic fundamentals from Friday’s release of March CPI (forecast core 0.1%, month-on-month) and retail sales (0.3%, ex-autos 0.1% m/m).

Poloz described the monthly inflation data as a “noisy indicator” and since a soft reading is expected, it should have minimal impact. A weak retail sales number should also be a non-event as it has already been discounted in the weak Q1 GDP data.

That leaves next Wednesday’s BoC interest rate decision and statement to provide the next piece of the puzzle. There is zero risk of a rate move leaving the statement to provide some direction.

Was yesterday’s Poloz speech a prelude to an optimistic outlook touting a partial recovery?

USDCAD movements will mirror general US dollar direction against the majors with a bias for further gains on anticipation of month end demand for US dollars, softer WTI oil prices and improving US data.

Can anyone shine a light on Canada’s economic fundamentals? Photo: iStock

USDCAD technical outlook

The intraday USDCAD technicals are bullish while trading above 1.2140 looking for a break above resistance in the 1.2240-60 area to extend gains to 1.2360. Yesterday’s break of resistance in the 1.2180-90 zone suggests that a short-term bottom is in place at 1.1950.

However, the short-term downtrend from the end of March remains intact and until it is broken, the current rally is merely a correction. A move back below 1.2140 would put the focus back on 1.1950.

USDCAD 4-hour with short term downtrend highlighted

Source: Saxo Bank

– Edited by Oliver Morrison

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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