The Canadian dollar dove yesterday after the Bank of Canada (BoC) served up a far more dovish than expected policy statement. It has lost over 2.5% of its value against the U.S. dollar since Monday, and it appears that it will lose even more in the coming days.
The BoC signaled a downgraded interest rate outlook when it tweaked the policy statement. In January, members of the bank wrote, "Weighing all of these factors, Governing Council continues to judge that the policy interest rate will need to rise over time into a neutral range to achieve the inflation target." Yesterday, they amended that phrase to: "Governing Council judges that the outlook continues to warrant a policy interest rate that is below its neutral range." They went from talking about the need to raise domestic rates to justifying why rates should remain unchanged.
The BoC said it was surprised by the sharpness of the slowdown in Q4 and by the fact it was broadly based, noting consumer spending and the housing market were soft. Members also pointed out that exports and business investment were weaker than expected.
Economists and strategists pushed out their forecasts for a BoC rate hike until the end of 2019 or into 2020. Some analysts warned that the next move could be to cut rates, although that seems to be far-fetched. The BoC expected an economic slowdown in late 2018 and early 2019 due to last year's steep plunge in oil prices which raises questions about yesterday’s dovish tilt. Perhaps members were influenced by the actions of other G-10 central banks. The Reserve Bank of Australia, Bank of Japan, U.S. Federal Reserve and European Central Bank have taken a dovish turn, and they all blamed slowing global economic growth and trade tensions for the move. The BoC cited the same factors for its decision.
Canadian dollar traders will be hoping that BoC Deputy Governor Lynn Patterson provides some clarity on yesterday’s decision. She is giving a speech titled "A Progress Report on the Economy" just after lunch today. Her remarks may suggest that although the recent data was weaker than expected, the outlook is still rather positive which would certainly inject a bit of two-way risk into Canadian dollar trading.
The Canadian dollar also suffered from broad-based U.S. dollar strength. The greenback has risen steadily against the major G-10 currencies since last Friday’s closing rate for a host of reasons. GBP/USD has lost ground because of Brexit issues and the belief that since the U.K. wants to avoid a no-deal" Brexit, the European Union is not motivated to re-open negotiations. AUD/USD is down after its central bank turned dovish, with some analysts believing that a rate cut is possible.
The European Central Bank (ECB) policy meeting is underway. It is expected to issue a dovish statement and reintroduce some stimulus which is weighing on EUR/USD.
This morning's U.S. data will not be a trading factor for FX markets.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians