USD/CAD is trading in a $1.3250-$1.3520 band and has been since the beginning of March. It is likely to continue doing so for the foreseeable future as long as the Bank of Canada monetary policy bias remains dovish and oil prices stay firm. The key driver of Canadian dollar direction is U.S. dollar sentiment and that sentiment flipped to modestly hawkish yesterday following the Federal Open Market Committee (FOMC) policy meeting.
Wednesday’s FOMC statement was expected to be a non-event, and, for the most part, it was. There was only a mild tweak to the wording, but it didn’t leave any doubt that the Committee maintained a dovish bias. The statement repeated the March phrase that "On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent." The U.S. dollar was sold immediately following the FOMC statement’s release with traders believing that the Committee could be contemplating cutting interest rates because U.S. inflation was stubbornly low.
However, Fed Chair Jerome Powell delivered a somewhat different assessment of the inflation outlook in his press conference and that caused a bit of a kerfuffle. His press conference comments were a tad more hawkish than the FOMC statement. Powell blamed "transitory" factors for the recent soft inflation numbers and reiterated the view that with a strong job market and continued growth, inflation will return to 2% over time and then be roughly symmetric around our longer-term objective.
Traders immediately decided that expectations of a looming Fed rate cut were sorely misplaced and rushed to buy U.S. dollars. The greenback closed the day with strong gains across the board.
The Asia reaction was understated in part because of holidays in Japan and China. AUD/USD and NZD/USD were close to unchanged at this morning’s Toronto open. Even headlines about "good progress" being made in the U.S./China trade talks, didn’t spur much activity.
U.K. traders focused on today’s Bank of England Policy meeting. The BoE left rates unchanged at 0.75%, and the vote was unanimous. The Gross Domestic Product growth forecast was trimmed, but that was expected, and GBP/USD remained in its overnight range of $1.3027-$1.3078.
The Canadian dollar was a bystander during the overnight session. Traders ignored the plunge in oil prices stemming from the sharp increase in U.S. crude inventories and the currency traded in a tight band.
The U.S. data calendar includes weekly jobless claims and factory orders, but traders are looking ahead to Friday’s U.S. and Canadian employment reports.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
