BOC unchanged as expected; USDCAD dips below 1.32

Summary:

• As widely expected BOC keep overnight rate unchanged at 1.75%

• Downwards revisions seen to GDP and CPI forecasts

• CAD mixed but USDCAD dips below 1.32; Poloz press conference to come

The latest monetary policy decision from the Bank of Canada (BOC) has seen no change in the base rate, with the overnight interest rate remaining at 1.75%. Despite this, there has been heightened volatility in the Canadian dollar since the announcement with the USDCAD pair falling below 1.32 to tag its lowest level since the beginning of December. Looking at the accompanying statement there doesn’t really seem to be too much on the hawkish side to support further gains in the Loonie, with the initial gains possibly due to it not being as dovish as some had expected.

USDCAD has been volatile since the release, dropping quite sharply in the minutes that followed to fall below the 1.32 handle to trade at its lowest level in over a month. Source: xStation

Selected passages from the statement are as follows:

“ The Bank projects real GDP will grow by 1.7 per cent in 2019, 0.4 percentage points slower than the October outlook. This revised forecast reflects a temporary slowing in the fourth quarter of 2018 and the first quarter of 2019. This will open up a modest amount of excess capacity, primarily in oil-producing regions. Nevertheless, indicators of demand should start to show renewed momentum in early 2019, leading to above-potential growth of 2.1 per cent in 2020.

Core inflation measures remain clustered close to 2 per cent. As expected, CPI inflation eased to 1.7% in November, due to lower gasoline prices. CPI inflation is projected to edge further down and be below 2 per cent through much of 2019, owing mainly to lower gasoline prices. On the other hand, the lower level of the Canadian dollar will exert some upward pressure on inflation. As these transitory effects unwind and excess capacity is absorbed, inflation will return to around the 2 per cent target by late 2019.”

These revisions seem negative at first glance, but against a backdrop of pretty low expectations I’d say the tone of the overall statement was actually pretty neutral. One other interesting takeaway was comments that the drop in oil prices are having a “material” effect on the outlook and will result in “lower terms of trade and national income.” The Canadian economy is sensitive to moves in the crude price and the large drop of almost 40% in the past few months is clearly a cause of concern for policy makers.  

There’s historically been a close correlation between industrial GDP and oil extraction in Canada. Source: XTB Macrobond   

The USDCAD dipped below the 1.32 level shortly after the release but has since bounced back again. A press conference with Governor Poloz (4:15PM) is still to come so we may get further developments on this font and how the market ends today could well be pivotal going forward. After a strong run higher in the final quarter of 2018 there’s been a sharp pullback in recent session with price swiftly tumbling to the 50% fib of the advance around 1.3221. There has yet to be a confirmed break below this level and if there is any reversal signals printed around here then a push back higher may lie ahead with the 38.2% fib at 1.3324 the next level to look to for possible resistance. Should price continue lower then the 61.8% and 78.6% fibs at 1.3118 and 1.2970 respectively are possible areas of interest.

USDCAD is hovering around the 50% fib retracement at 1.3221 of the large advance seen in Q4 2018. Source: xStation