Economic Highlights
Between the slump of oil prices, the speeches of the central bankers and the release of several economic indicators, financial markets have had a lot to get their teeth into last week.
On Tuesday, central bankers took the market by surprise in their respective speeches. While Fed Chairwoman Janet Yellen delivered a dovish speech, Governor Stephen Poloz drew a much more optimistic portrait of the Canadian economy than anticipated.
In terms of economic indicators, the inflation rate in the US decreased by 0.1% in January, in line with market expectations.
In Canada, the inflationary pressure in January was 1.0%, higher than the 0.8% expected by consensus.
On Friday, the second reading of the Q4 2014 GDP growth in the US came out stronger than expected. Markets anticipated a drop of 0.6% from the original release; the actual drop was only of 0.4%.
FX
The USD/CAD rate has again exhibited significant volatility last week. In the first place, Janet Yellen has proven to be dovish in her testimony Tuesday. Even if she acknowledged that the labor market has improved, she noted that wage growth remains disappointing and pointed out that foreign outlook still represents a risk for the US economy. Nonetheless, Chairwoman Yellen discussed the Fed’s policy with respect to an eventual interest rate rise. Essentially, she mentioned that any rate hike would be preceded by a detailed update of the institution’s Forward Guidance. Accordingly, the Fed could be patient in its process of normalizing interest rates.
Meanwhile, in Canada, Stephen Poloz mentioned that low oil prices have had an immediate negative effect on the economy, while many benefits of the situation have not yet been felt. He notably referred to the strength of the American economy and the ensuing consumption as positive drivers for Canada. According to him, the January rate cut was more of a downside risk protection rather than an assessment of weakness of the Canadian economy. The ultimate effect of both speeches was an appreciation of the Canadian dollar against the Greenback, where the CAD gained more than 125 points on Tuesday.
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