Through the BOC’s Rose-Tinted Glasses

In a move that surprised very few, the Bank of Canada (BOC) presented its unbelievably rosy outlook for the economy during its most recent rate statement. In doing so, policymakers kept the Canadian bank an outlier among the other major central banks, which have embraced dovish stances as of late.

As we all know, this isn’t the first time the BOC adopted an optimistic tone. In its July monetary policy statement, BOC Governor Mark Carney had already declared that tighter monetary policy might by appropriate. Now, it seems that the central bank head is sticking to his guns, saying that domestic growth will keep the economy afloat.

According to the latest statement, business investment and consumer spending should make up for a lag in exports to fuel the economy’s growth in the coming year. And once again, the BOC reiterated words that we had already heard many times before – as long as the economy keeps growing and picks up excess slack, a “considerable monetary policy stimulus may become appropriate.”

However, recent Canadian economic reports suggest that either the BOC is being overly optimistic or Governor Carney really needs to get his eyes checked!

While the BOC believes that domestic spending continues to support the Canadian economy, wholesale and retail sales data for June are telling a different story. Wholesale sales posted a 0.1% drop for the month, lower than the previous month’s 0.9% increase and against expectations of a 0.3% uptick. Both core and headline retail sales printed 0.4% declines in June while the May figures suffered significant downward revisions.

In fact, if you check the economic calendar, you’d realize that most of Canada’s recent data released last month came in the red. Among these are manufacturing sales, core and headline CPI, foreign securities purchases, and current account balance.

Aside from these, the Canadian dollar’s persistent strength continues to post a threat to their export industry, which comprises a huge chunk of their economic output.

Judging by USD/CAD’s price action yesterday, it seems that market players are aware of the disconnect between the BOC’s optimism and the actual Canadian data. Instead of falling at the BOC’s hawkish statements, USD/CAD shot up by 50 pips in the next two hours after the release!

On the other hand, the Loonie’s price action could also be caused by its overbought levels. In my BOC Rate Decision Trading Guide this week, I pointed out that the Loonie could face correction after months of strengthening against the Greenback. For those who aren’t keeping track, USD/CAD was trading at the 1.0400 level in early June. That’s a dizzying 500 pips away from its current levels, folks!

If the Loonie is just experiencing a correction, then the Loonie bulls could wait for retracement levels to materialize. But if the Loonie’s price action is caused by traders doubting the BOC’s optimistic outlook, then we better watch the charts closely and see if USD/CAD goes back to its mid-year highs!

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