Few days ago, the Bank of Canada Governor, Stephen Poloz delivered his speech, which the markets translating it to be hawkish on a few comments made. He noted that the surprise rate cut in January was more of an “insurance” against the downside risks posed due to falling crude oil prices and inflation, especially for a country such as Canada which is quite dependent on Oil production and that the Central bank could wait and watch before making their next move.
The markets took note of the fact that the January rate cut from the BoC gave the Central Bank enough time to assess the impacts of falling Crude oil prices and inflation. Thus, a possible rate cut in March seems to be unlikely at this point. However, today’s inflation data from Canada could shift the larger sentiment in either direction. A better than expected reading could shrink the possibility of a rate cut in March, which could be a short term bullish play in the Canadian dollar.
Economists expect Canadian headline CPI to rise to 0.1% while drop to -0.4% on the core, a modest improvement from last month’s decline to -0.7% on the core and -0.3% on the headline.
The Canadian Dollar has been weaker for the most of this month after the surprise January rate cuts, falling against other commodity risk currencies including the Australian and Kiwi Dollars.
With the markets reacting to a perceived dovish outlook by Janet Yellen’s testimony this week along with the previously released FOMC meeting minutes, the Loonie got a breather as the pair eased from highs of 1.2716 to trade near 1.242 levels at the time of writing.
The Bank of Canada meets on 4th of March for its monthly monetary policy and today’s CPI data is very likely to be discussed as well. In this aspect, the markets will be focusing their attention to the Canadian CPI data today which could offer early clues into the BoC’s monetary policy outcome.
In terms of the Crude oil prices, the decline in the month of January was a lot less harsh compared to the previous months and this is likely to rub off into the CPI readings, especially for a country like Canada. Therefore there is a slight hint of the CPI numbers being able to come out better than the previous month’s data.
From a technical perspective, the USDCAD has been showing signs of topping off, as the pair failed to make any new highs after 1.27 was briefly breached, while in the process, the chart shows a strong consolidation pattern being formed in the shapes of a descending triangle. This pattern gives a potential downside correction towards 1.2211 levels. Although we expect to see declines, this corrective move is merely that, a correction as we except the Greenback to pick up and start its rally yet again. Other risks to the pair come from the US CPI data also due today.
