- CAD rate cut “buys us time”
- Need time for lower oil prices to have impact
- BoC to wait on sidelines
- Higher crude temporarily supporting CAD
Governor Poloz from Bank of Canada said nothing to upset the market balance in his speech in London this morning. The Governor has been criticized by various sections of the market about miscommunicating the banks message over the previous two months. In January he surprised markets by cutting interest rates before shifting to a “neutral” policy stance in a speech in late February. The street was looking for further clarity in his position.
The Loonie is holding relatively steady, within its contained trading range ($1.2410-$1.2510) for the time being, after BoC Governor Poloz reiterated in London the -25bps rate cut in January “has bought us some time” to monitor economic developments as the impact from the decline in crude prices work’s its way through the system. Negative effects from price decline in crude are beginning to appear from Canada’s top export.
The Governor suggested that it would take longer for the positive impact from lower prices to emerge. He did admit, not unlike his colleague and former BoC Governor, Mark Carney at the BoE, that global recovery remains uneven and fragile, but progressing. This would suggest that the BoC is prepared to wait on the sidelines, see how things work themselves out, before policy makers make their next move on rates. However, market volatility is expected during transition to conventional monetary policy, while forward guidance is best reserved for extraordinary times. The Governor’s speech largely reinforces the idea that the central bank is now very much in ‘data dependent’ mode, similar to the Fed, and will be watching oil prices very closely.
The CAD has benefited greatly from last week’s Fed statement, which seems to have put a dovish spin on the Fed’s policy stance. The timing of the Fed’s first-rate hike has now been pushed further out the curve; with the market leaning towards a September hike rather than a June move. The massive unwinding of “long” dollar positions across the board has seen the loonie rally from its double top CAD$1.2800+ to this morning’s U.S dollar low. The overnight rally in WTI crude oil by $3 to $52 a barrel as the Saudis lead a 10-nation coalition in air strikes on Yemen’s has been supporting commodity sensitive currencies.
Trading the currency pair has been rather choppy of late, mostly within established ranges. The loonie bear has to be worried that USD/CAD has failed to extend the long-term rally through C$1.2800 area. It has now stalled twice atop of this level. The CAD should be retaining its weakening bias due to softer fundamentals, but failing to hold on to new dollar highs (CAD$1.2417 this morning) will have the ‘weak’ CAD shorts worried. For the time being the CAD remains at the mercy of “big” dollar flows and crude prices.