• Central banks' messages fall on deaf ears
• Canada MPR release upbeat
• USDCAD consolidation ahead
The Easter weekend holiday should see a quick evaporation of liquidity heading into Friday. Monday is a holiday in many countries that will guarantee a slow start to the new trading week, providing Russia and Ukraine go Easter egg hunting rather than head hunting. Today's Canadian CPI data will prove to be a non-event coming so soon after the interest rate decision and the Monetary Policy Report.
These three images have one thing in common. Yes, a fondness for chocolate eggs may be one shared characteristic although big ears are probably the better answer. It is fair to say that if this trio listened to the recent speeches from the European Central Bank president Mario Draghi, the US Federal Reserve chairman Janet Yellen and the Bank of Canada (BoC) governor Stephen Poloz, their aural capacities would have allowed them to clearly hear the messages being delivered which is: "interest rates aren't going anywhere any time soon".
The FX markets are only just starting to get the message and that is because yesterday the Fed chairman reiterated the view that an unemployment rate of 6.5 percent was a threshold and not a trigger. She said: "Specifically, in determining how long to maintain the current target range of 0 to 25 basis points for the federal funds rate, the Committee will assess progress, both realised and expected, toward its objectives of maximum employment and 2 percent."
Mr Poloz has to accept some blame for the confusion surrounding the direction of Canadian interest rates and the currency. Yesterday, he appeared to be deliberately trying to "talk down" the currency by repeating that interest rates would be cut to fight deflation, and said in such a fashion as to garner headlines. He said: "We are neutral. That means a rate cut cannot be taken off the table." By definition, neutral would also mean that a rate hike cannot be taken off the table. Furthermore, both the interest rate statement and the MPR have a reasonably optimistic outlook for the Canadian economy that the media downplayed. To be fair, the BoC did say that 2016 GDP would be closer to 2 percent, down from the average of 2.5 percent in 2014 and 2015. However, the BoC did not note its poor track record for forecasting GDP.
Verbal intervention in currency markets is in vogue yet the short-term results tend to fade rapidly. Draghi managed to take the EURUSD down a notch or two last Saturday when he warned that further gains in the EUR would trigger additional monetary easing to keep inflation from falling too low. It is fair to say that a 0.0040 point drop in EURUSD was unlikely to be the desired result. Draghi is also to blame for the markets' confusion on Eurozone interest rates. He is constantly warning about the perils of deflation but the ECB statement is maintaining that "incoming information confirms that the moderate recovery of the euro area economy is proceeding in line with our previous assessment".
You will have better luck hunting for Easter eggs this weekend then you will have trying to discern central bank interest rate tendencies from the recent press conferences and speeches.
USDCAD range with bias higher
The Bank of Canada went to great pains to "talk down" the Canadian dollar yesterday, repeating warnings of interest rate cuts to fight deflation. It goes to great lengths to detail its concern over inflation and then pats itself on the back by stating that "The Bank judges that the balance of these risks remains within the zone for which the current stance of monetary policy is appropriate." The focus on inflation and the references to the "lower Canadian dollar" providing additional support to economic growth implies a tacit endorsement of a weaker currency. At best, the weaker loonie encouragement may help to shore up the floor.
USDCAD Technicals for the week ahead
The short-term USDCAD technicals are bullish. The down trend from the March peak of 1.1270 ended on Tuesday with the move back above 1.0980. There is an intraday USDCAD up trend from the 1.0860 low that will accelerate on a break above 1.1040-60, which would confirm a short-term low in place at 1.0960 and project further gains to 1.1160. A move below uptrend support (currently 1.0990) would lead to another test of 1.0960. The 1.0960 area is garnering additional support from the 100-day moving average and 50 percent Fibonacci level at 1.0928. This implies a trading range of 1.0960-1.1040 for next week.
