The Bank of Canada quickly replaced the wheels that came off the Canadian dollar rally bus yesterday. The BoC surprised markets with a hawkish tilt. BoC officials have been telling Canadians that interest rates would remain unchanged "into 2023." Not any more.
Yesterday, they predicted a rate hike in the second half of 2022.
The BoC upgraded its 2021 Gross Domestic Product growth forecast by a whopping 2.5% to 6.8%. The bank said, "the economic outlook has improved due to the resilience of Canadian households." It is a bizarre move when you consider a large swath of the country is under very restrictive measures to combat the third-wave coronavirus outbreak. At least two-thirds of the country has closed interprovincial borders to non-essential travel and imposed harsh restrictions on citizens, including stay-at-home orders.
That is hardy warrants a 2.5% growth upgrade.
The action is even more bizarre because the BoC admits "the third wave has introduced a new dimension of uncertainty and is straining health care resources in some regions. This will slow the return to work for many low-wage earners, young people and women in hard-to-distance sectors who have borne the brunt of job losses throughout the pandemic. Too many Canadians remain out of work, and there is still considerable excess supply in the economy."
BoC analysts may be too insulated from reality. There are over 300 economists on the payroll. None of them lost a dollar of income because of the virus. Pandemic measures did not just impact low wage earners. Pilots, Advertising professional, Senior Hospitality managers, and Construction workers have lost wages, and they may never recoup their losses.
USD/CAD plunged to $1.2470 from $1.2630 following the BoC announcement. Prices will continue to consolidate below $1.2550 with a negative bias.
EURUSD bounced back and forth in a $1.2023-55 range overnight and returning to the top of the band in early NY trading. The odds favour a non-event meeting, leaving global risk sentiment to dictate price direction. The intraday technicals are bullish above the $1.1990 area.
AUDUSD drifted in a narrow $0.7740-$0.7763 band and could not gain any traction from the better than expected NAB Business Confidence Survey (actual 17 vs forecast 7). The government of Australia canceled two Victoria State and China Belt and Road deals because they contradicted Australia’s "free and open Indo Pacific" goals. China described the move as "provocative."
U.S. weekly jobless claims are forecast to climb to 617,000 from last week’s 576,000 result. Existing Home Sales for March are expected to rise 0.8% m/m.
Canadian new home sales data is due.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
