The Canadian dollar was devastated by another Bank of Canada (BoC) monetary policy turnaround. BoC Governor Stephen Poloz had set markets up to expect a neutral monetary policy statement on January 22. The December statement bragged about the accuracy of the bank's October global economic growth projections.
It said that there was nascent evidence the global economy was stabilizing. while projecting higher growth over the next two years. It did say that ongoing trade conflicts and related uncertainty were weighing on global activity, describing it as the biggest source of risk to their outlook.
That risk disappeared on January 15 when Chinese officials met in Washington to sign the Phase-One trade agreement. Therefore, it was easy to assume the BoC would deliver a somewhat neutral policy outlook. Unfortunately, the adage about why you should never assume anything proved accurate.
The Bank of Canada issued an unequivocally dovish statement. It is now concerned about a high degree of uncertainty around trade and rising geopolitical factors alongside mixed indicators, and the current level of interest rates is no longer appropriate. Instead "Governing Council will be watching closely to see if the recent slowdown in growth is more persistent than forecast. In assessing incoming data, the Bank will be paying particular attention to developments in consumer spending, the housing market, and business investment." USD/CAD soared on the news, rising from $1.3040 to $1.3170 overnight.
The Australian dollar was the best performing major G-10 currency overnight. AUD/USD rallied, rising from $0.68400 to $0.6877 after Australian employment data surprised to the upside. Australia gained 28,900 new jobs while the unemployment rate fell to 5.1% from 5.2%.
The news alleviated some of the pressure on the Reserve Bank of Australia to cut interest rates. The New Zealand dollar was largely ignored and opened in Toronto unchanged from yesterday’s closing level.
USD/JPY fell because of renewed safe-haven demand for yen because of the Wuhan coronavirus. Also, another drop in US Treasury yields and a drift lower in equity prices contributed to the selloff.
FX market liquidity in Asia is going to suffer next week with the start of the Chinese New Year. The celebrations begin on January 25 and continue until February 8.
EUR/USD traded in a tight range ahead of today’s European Central Bank (ECB) policy meeting. This meeting is expected to be benign. The ECB releases the parameters of their planned review of their operations and policies this afternoon.
GBP/USD managed to hand on to this week’s gains following data that suggested the Bank of England may not need to trim its benchmark interest rate. Rate cut fever had risen following comments from many BoE officials warning of the need to stimulate economic growth.
There are not any notable economic reports from the U.S. or Canada today, suggesting more FX consolidation is in the cards.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
