CAD: Expectations Vs Reality

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You must be wondering why I keep writing about the Canadian dollar. My first article for this column was on September 13, followed by October 11 and January 17. Over the last 12 months, the Canadian dollar has risen 8% against the US dollar. It is the strongest currency among the G10 currencies over the last 4 weeks. So, what happened to the currency after yesterday’s announcement from the Bank of Canada and where do we go from here?

It is no secret that market reactions to central bank interest rate announcements and most other data reports are usually a result of expectations prevailing prior to the announcement, rather than strictly the content of the announcement itself. In the case of Wednesday’s announcement from the BoC, the decline in the loonie was largely a result of somewhat excessively hawkish expectations and bullish positioning. So let’s take a closer look at the announcement and what it really means for the currency ahead.

Main message from the Bank of Canada:

  • The Bank of Canada statement highlighted some progress on inflation but the bias towards ‘caution’ remained. That was part of a series of contradictions that added to the apparent confusions with regards to the near-term outlook.
  • In fact, the inflation view for 2018 was raised to 2.3% from 2.0% in the previous meeting. If that is not positive for the currency, I don’t know what is.
  • The upgrade to global growth was accompanied with a reduction in the Canada’s 2018 GDP forecast to 2.0% from 2.2% but again, the CPI upgrade supersedes such minor adjustment to growth.

CAD: Expectations Vs Reality

CAD extended its descent after BoC governor Poloz noted there was more room for demand growth before inflation kicks in. All this kept the odds of a May rate hike at 48%. USD/CAD jumped more than a full cent to as high as 1.2660 – a relatively minor retracement from the recent fall. The bounce in the pair was partly contained by the jump in US crude oil crude to $69.00s from $65.75 two days ago.

And so, despite exaggerated currency moves stemming from preconceived expectations that the BoC was going to raise rates, or that it was going to drop its “cautious” reference to the economic conditions, we must always focus on what actually happened and compare it to the previous announcements (not to create misplaced or biased expectations).

I cannot end this piece without telling you to closely watch the Bank of Canada’s latest reports on inflation and retail sales on Friday. More importantly, I’ll end the piece by reiterating that 1.20 remains the likely target and not 1.28.

 

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