Range of the Week: 1.3100 – 1.3550
Last week was an eventful one for the three asset classes we watch most closely, with a fluctuation of more than 350 points for the USD/CAD pair, a Bank of Canada key rate decision, and a rumoured confirmation of crude oil output cuts by the main countries that reached an agreement on the matter in November. The week also ended with a major event covered by media around the world: the inauguration of Donald Trump as the 45th president of the United States.
The Bank of Canada (BoC) announced its key rate decision on Wednesday and updated its economic outlook given the significant climate of uncertainty brought on by the swearing in of Donald Trump. Not surprisingly, BoC Governor Stephen Poloz decided to keep the key rate unchanged at 0.50% with the impact of the Trump administration’s fiscal and potential protectionist measures on the Canadian economy still difficult to quantify. Poloz expressed concerns regarding the Canadian economy’s excess capacity and the strength of the loonie, which is dampening the outlook for export growth. The central bank nevertheless slightly raised its real GDP growth forecast for 2017 mainly due to the government’s fiscal measures and consumption. However, Poloz noted that the economic data released since the last BoC meeting in October were encouraging, citing retail sales and employment figures in particular. Currency markets seemed to retain the more negative comments, as the Canadian dollar lost ground against the greenback to end the week down by more than 200 points.
The indicators released on Friday, two days after Poloz’s comments, came in slightly below expectations. Annualized inflation was 1.5% in December, short of the expected 1.7%, while retail sales rose only by 0.2% compared to the forecasted growth of 0.5%. Despite these data not being as high as economists had predicted, inflation showed signs of acceleration compared to the previous months and (excluding the most volatile elements, food and energy prices) the change in the consumer price index was the most significant in five months. Retail sales were up by 0.7% on an actual basis (i.e., excluding the effects of price variations) and ended the third month in a row with significant volume growth. However, due to uncertainty, interest rate futures are not pricing in a significant probability of rate hikes in Canada before 2018, maintaining fixed rates (swap rates) at relatively low levels. It could therefore be interesting for borrowers to lock in a portion of their exposure to interest rates.
Few indicators were released in the United States with the focus being on Mr. Trump’s inauguration. However, certain members of the Federal Reserve discussed their vision for the U.S. economy. San Francisco Fed President John Williams advocated for gradual rate increases to keep the U.S. economy on track and avoid excessive inflation or speculative bubbles. Federal Reserve Chair Janet Yellen’s comments were along the same lines and did not sway markets significantly.
Few indicators are expected in North America at the beginning of this week. President Trump’s first decisions will no doubt play a prominent role in economic news. Comments related to trade agreements such as NAFTA and the Trans-Pacific Partnership will be of particular interest to investors. Friday will be busy in terms of U.S. economic indicators with the release of U.S. GDP figures for the fourth quarter of 2016 and U.S. Durable Goods Orders data.