The Bank of Canada (BoC) flip-flopped with its economic outlook yesterday and the Canadian dollar was crushed. The BoC left interest rates unchanged at its policy meeting on Wednesday which was a widely-expected result, but the tone of the policy statement caught markets off-guard. The BoC took a noticeably dovish tilt compared to the October statement.
In October, the Canadian dollar rallied and forecasters penciled in a faster pace of domestic rate hike when the BoC statement suggested a fairly robust outlook for the domestic economy. At the time, they expected improved investment following the successful renegotiation of NAFTA. They were positive on the global economic outlook and said that the Canadian economy was operating close to its potential. They even upwardly revised projections for business investment and exports.
They weren’t as optimistic in yesterday’s statement. The BoC was concerned about global trade conflicts weighing on demand but were really spooked by the plunge in oil prices since the October meeting. West Texas Intermediate (WTI) dropped from $67.60 to a low of $49.70 during that period. It said that "activity in Canada’s energy sector will likely be materially weaker than expected." It also said that the data suggested a slowing of Gross Domestic Product growth momentum going into the fourth quarter, and predicted an easing of inflation. Traders interpreted the statement as dovish, and they sold Canadian dollars.
The Canadian dollar selling intensified overnight. A stampede into safe-haven currencies sparked by fears of renewed China-U.S. trade tensions drove the commodity currency bloc lower and lifted the Japanese yen. The trade fears were reignited when news broke that Canada, at the request of the U.S. Justice Department, arrested Huawei Chief Financial Officer and Deputy Chair Meng Wanzhou. The Americans have accused her of violating sanctions with Iran. She has been in custody since Saturday when U.S. President Trump and Chinese President Xi were negotiating a trade truce. Canada has placed a publication ban on the story.
China is outraged and is demanding her immediate release. There is a risk that Canada’s actions may lead to recriminations from China which would not do the Canadian dollar any favours.
Elevated U.S./China trade tensions aren’t the only risk to the Canadian dollar. The Organization of Petroleum Exporting Countries (OPEC) is meeting today and hoping to agree to increase existing production cuts. Apparently, Russia is balking at the size of its contribution and Iran is not even going to participate.
The Canadian dollar could get a reprieve after BoC Governor Stephen Poloz’s speech this morning. Traders are hoping he will clarify the BoC’s policy stance. Is it hawkish or dovish?
There is a lot of U.S. and Canadian economic data today, but it may be overshadowed by Wall Street price action and caution ahead of Friday’s U.S. employment report.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
