• Russia/Ukraine issues a risk to ranges
• Bank of Canada ambiguous
• Yellen speech a wild card
It's the middle of a shortened holiday week and the currency markets are lacking a cohesive theme. This is making for choppy trading within existing ranges although traders are warily eyeing developments in the Ukraine. Pro-Russian militia and Ukrainian government forces are jockeying for position in eastern Ukraine before officials from the EU, US, Ukraine and Russia meet in Geneva on Thursday in an attempt to diffuse tensions in the area. The start of the week pressure on EURUSD was not sustained, having stemmed from remarks by European Central Bank president Mario Draghi over the weekend, better-than-expected US retail sales and the Russia/Ukraine dispute. Wednesday has brought a modest improvement in risk sentiment even though the rationale is tenuous. USDJPY rose on a rising Nikkei while Chinese data releases were mixed. GBPUSD jumped on a better-than-expected labour report. US housing starts were below forecast (Actual 946,000 vs. Forecast 973,000 month-over-month). Unfortunately, all of the above are like an unlabelled box of Lego bricks i.e. pretty to look but lacking directions. Maybe Janet Yellen's speech today will provide a plan for the bricks.
BoC keeps status quo on interest rates
USDCAD jumped 0.0030 points when the Bank of Canada announced there would be no change in its interest rate policy, as traders focused on headlines culled from the statement. As has been the case lately, the headlines scrambled the tone of the statement that isn't as dove-like as the headlines imply. In fact, the tone of the statement is fairly positive stating that "CPI inflation will remain close to target". You will recall that speculation of an interest rate cut due to persistently weak inflation caused a large part of the USDCAD rally from last October. This statement seems to put that notion to rest. The statement is rather positive on the outlook for global economic growth. Domestic GDP growth is projected to be 2.5 percent in 2014 and then declining to 2 percent in 2015, which was likely the major negative in the entire statement.
USDCAD technical outlook
USDCAD is in the process of consolidating recent losses stemming from the loss of support in the 1.1020-40 zone. The initial USDCAD floor of 1.0858 is just below the 38.2 percent Fibonacci retracement level of the entire October 2013-March 2014 range. If the 1.0850 level breaks, USDCAD could retrace back to 1.0650, which is the 61.8 percent retracement of the October-March range. A move above 1.1060 would suggest that a short-term bottom is in place, and retargeting the March peak.
Chart: USDCAD daily with Fibonacci and moving averages
Highlight of the BoC Quarterly Monetary Policy Report (MPR)
The Bank of Canada interest rate statement wasn't the only official report released by the central bank today. The MPR described an improving global economy that is expected to lift Canadian exports. One notable factor is that the BoC appears to have stolen a page from the Reserve Bank of Australia's playbook by making more specific references to the Canadian dollar exchange rate. The MPR states: "The Canadian dollar has averaged approximately US 0. 91 since the March fixed announcement date, in line with the assumption in January. By convention, the Canadian dollar is assumed to remain at its recent level of US 0.91 over the projection horizon"