The Canadian dollar is parked. USD/CAD price action was contained to a very narrow $1.3072-$1.3098 range overnight, despite large U.S. dollar gains against the Euro and British pound. The wait for the results of this morning’s Bank of Canada (BoC) policy statement, Monetary Policy Report (MPR) and BoC Governor Poloz press conference have insulated the Canadian dollar from global influences, for today.
The BoC is universally expected to raise the overnight rate by 0.25% to 1.75% from 1.50%. FX markets and markets in general are extremely interest in the tone of the statement as well as the MPR forecasts and how it has changed following the successful completion of the trade negotiations.
The BoC often said that policy decisions were "data-dependent, not headline-dependent." The veracity of that statement will be tested depending upon today’s results. Analysts have tempered their enthusiasm for a hawkish result because of last Friday’s weaker-than-expected Retail Sales and inflation data.
However, Core inflation is still at the Bank’s 2.0% target. Those softer-than-expected economic reports triggered a debate about whether the BoC will drop "gradual" in this line from the September statement: "We will continue to take a gradual approach, guided by incoming data." If so, it will be seen as a hawkish move and the Canadian dollar will soar.
More importantly the Business Outlook Survey in Q3 was robust. Companies reported strong demand, capacity constraints, price pressures and indicated increased investment plans. The BoC noted that the Survey indicator "remains at almost record levels, consistent with widely held positive views on most indicators." And the survey interviews happened before the United States Mexico Canada Agreement (USMCA) was announced.
Enthusiasm for a hawkish BoC policy meeting result is being tempered by external factors. U.S. Equity Futures were in negative territory for most of the European session, pointing to a negative open on Wall Street. However, prices have recovered and Wall Street may open flat. U.S. Equity market volatility has resulted in bouts of risk aversion around the globe. President Trump worsened the poor sentiment with his verbal attacks on the Fed. Those attacks were repeated in a Wall Street Journal article published today. Trump said (again): "To me, the Fed is the biggest risk, because I think interest rates are being raised too quickly."
The FX market drift toward safe-haven assets is not just because of U.S. stocks and Trump. EUR/USD is under pressure because of a budget disagreement between Italy and the European Union. The E.U. rejected Italy’s planned budget deficit of 2.4% of Gross Domestic Product. The new Italian government doesn’t seem to care what the E.U. thinks. Traders are waiting for European Central Bank President Mario Draghi’s thoughts on the issue at Thursday’s ECB policy meeting. U.K. Brexit headlines have been increasingly negative, elevating the risk of a "no-deal Brexit." GBP/USD is being sold on those concerns.
Today’s FX direction will be dictated by U.S. equity price action over second-tier U.S. economic data.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
