The first Bank of Canada (BoC) monetary policy meeting of 2019 is this morning, and it will be a big deal for Canadian dollar traders. The domestic currency has rallied 3.1% since January 2 and some analysts expect a further 2.0% gain if the Monetary Policy Report and the interest rate statement are considered hawkish.
The BoC left interest rates unchanged at the December 5 meeting but expressed concerns about trade conflicts and oil prices. The statement was viewed a dovish by many, and the Canadian dollar sank.
Those concerns may have been alleviated to a degree by recent events. West Texas Intermediate (WTI) rallied 20.4% since the beginning of the year. Even better, Alberta’s crude production cuts and an increase in rail car shipments lifted the price of Western Canada Select (WCS) and narrowed the discount to $10.50/barrel from WTI.
China and the US just wrapped up another round of trade negotiations. President Trump tweeted "talks with China are going well" which injected a dose of optimism in global financial markets overnight.
The BoC may be relieved by the latest oil and trade developments but err on the side of caution and leave interest rates unchanged. The steep slide in oil prices from September will have put downward pressure on inflation. The World Bank and International Monetary Fund downgraded their global growth outlooks recently which suggests that demand for Canada’s exports could slow.
The BoC is not the only show in town today. The minutes from the Federal Open Market Committee (FOMC) meeting of December 19 will be released this afternoon. These minutes will be more interesting than usual because of the Fed Chair Jerome Powell’s u-turn from his post-meeting comments. The FOMC raised interest rates by 0.25% and left the door open to two more increases in 2019.
The market had priced in three hikes. However, the fact the Fed was even considering raising interest rates after the Wall Street carnage in December suggested to many, that the Fed was out of touch with reality. The Fed heard the message, and on January 4, Powell appeared to downplay his previous comments. He said the Fed would be patient and flexible with all its policy tools. Wall Street rallied and hadn’t looked back since.
This afternoon, traders will be poring over the minutes for clues of the Committee’s outlook and signs of dissent. St Louis Fed President James Bullard told the Wall Street Journal yesterday: "We’ve got a good level of the policy rate today, and there isn’t any pressing need to go higher."
The BoC meeting and the FOMC minutes suggest a busy day for Canadian dollar traders.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
