The Loonie’s winning streak ended last week, possibly on shifts in monetary policy divergence. Will this week’s top-tier reports bring the Loonie back up the forex hill?
Here are possible catalysts:
Poloz’ speech (May 1, 6:30 pm GMT)
In his speech last week the Bank of Canada (BOC) Governor basically explained why there are spots of weaknesses in Canada’s economy lately.
More importantly, he repeated the central bank’s bias that “higher interest rates will be warranted over time” even as “some degree of monetary policy accommodation will likely still be needed to keep inflation on target.”
Trade balance (May 3, 12:30 pm GMT)
Canada’s trade deficit widened from 1.9B to 2.7B CAD in February. Imports rose by 1.9% on higher energy imports, while exports shot up by 0.4% on higher sales of passenger cars and light trucks.
Luckily for Loonie bulls, traders were much more interested in the positive NAFTA updates, higher oil prices, and a bit of risk-taking to pay attention to such things as trade deficit.
This week analysts see Canada’s deficit tightening to 2.3B CAD in March. Take note that the U.S. ISM non-manufacturing PMI will be printed a few hours after the release, so make sure you stick close in case intraday trends shift during the trading session!
Last Week’s Price Review
The Loonie’s five-week winning streak ended last week when the Loonie turned in a mixed performance. However, it looks like the Loonie is set to resume its winning streak since the Loonie currently the second top-performing currency of the week (as of 5:00 pm GMT).
Looking at the overlay of CAD pairs and oil prices above, we can see that the Loonie didn’t really take directional cues for oil prices. Well, Wednesday seems to be an exemption since the Loonie and oil prices appeared to be moving in tandem back then.
Anyhow, if oil wasn’t giving the Loonie its marching orders, then what did?
Well, the likely reason for the Loonie’s broad-based strength is actually hard to come by since most market analysts are only focusing on USD/CAD so the most common commentary about the Loonie’s performance this week is how weak the Loonie is. Even though, you know, the Loonie isn’t really that weak if you compare the Loonie against a basket of other currencies.
But as I mentioned earlier when I reviewed the pound, the Fed, the BOE, and the BOC still have a hawkish bias. They have also already hiked their respective policy rates, and are expected to continue doing so, assuming economic conditions continue to evolve as expected.
In other words, monetary policy divergence was likely in play this week, which was to the Loonie’s benefit.
And evidence for this is the fact that the Loonie won out against everything except the Greenback. Well, the Loonie also initially got mauled by the pound until expectations for a May BOE rate hike got squished when U.K. Q1 GDP growth came in below the BOE’s own forecasts.
Another piece of evidence is that the Loonie appears to have been taking some directional cues from Canadian bond yields, as can be seen below. The correlation is particularly strong during the U.S. session and likely helped to decouple the Loonie from oil prices.
The positive correlation held until Canadian bond yields plunged on Friday but the Loonie held steady.
The plunge in Canadian bond yields was apparently a reaction to Trump’s announcement that he’s putting Canada in a watchlist of intellectual property violators and at the same level as China to boot. As to why the Loonie fought back, it looks like oil prices helped to provide some support.
As a side note, BOC Guv’nah Poloz and Senior Deputy Guv’nah Wilkins testified before the House of Commons Standing Committee on Finance on Monday and before the Standing Senate Committee on Wednesday. However, those testimonies were essentially duds.
Sure, Poloz tried to present a more cautious tone, especially during the first testimony wherein he hinted that he’s confident with keeping rates steady for now.
Even so, Poloz also reinforced the BOC’s hiking bias when he stated that:
“[T]here has been some progress on these four key areas of uncertainty, particularly the dynamics of inflation and wage growth. This progress reinforces our view that higher interest rates will be warranted over time.”
And in his second testimony, Poloz was even made to admit that more rate hikes are to be expected because the Canadian economy is “finally positive.” However, Poloz still tried to put a cautious spin to his testimony by warning that:
“Of course there are risks in moving too quickly – people have a lot of debt.”
“The last thing we … want to do is to cause a financial stability risk to be more significant by moving too quickly.”