Article Highlights

  • BOC kept interest rates on hold at 0.50% as expected
  • BOC Gov Poloz: Rate cut remains on the table if downside risks materialize
  • Poloz: Need to be mindful of CAD rate vs. currencies other than USD
  • Poloz: US fiscal stimulus won’t necessarily benefit Canada
  • U.S. headline CPI as expected at 0.3%, core CPI at 0.2%
  • U.S. industrial production rose 0.8% as expected
  • Fed head Yellen: Next hike depends on economy over coming months
  • Yellen: Economy close to achieving Fed’s dual goals, need to reduce support
  • Yellen: Waiting too long to hike could lead to aggressive tightening and recession
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Dollar domination was the name of the game as U.S. data hit the mark while Yellen hinted of a rate hike in the coming months. Meanwhile, the Loonie lagged after the BOC presser.

Major Events:

BOC monetary policy statement – As expected, the Bank of Canada kept interest rates on hold at 0.50% and BOC Governor Poloz clarified that they were nowhere near tightening anytime soon. He even mentioned that a rate cut remains on the table if downside risks materialize.

Instead of sounding more upbeat about the recent developments in the oil market, head honcho Poloz stressed that they need to be mindful of the Canadian dollar’s trading levels versus currencies other than the U.S. dollar as this could dampen export activity. He also noted that uncertainty remains even after the U.S. elections, particularly when it comes to trade agreements and tax changes. During the Q&A, Poloz pointed out that the potential positive impact of U.S. fiscal stimulus on their economy might not necessarily benefit Canada.

U.S. economic releases – Uncle Sam’s reports came in line with estimates and reflected improvements from previous readings. Headline CPI posted a 0.3% uptick, up from the earlier 0.2% gain, while core CPI printed a 0.2% increase for December.

Components of the report indicated that the components for shelter and gasoline accounted for most of the gains while the overall food index remained unchanged. Industrial production rose 0.8%, making up for the earlier 0.7% dip, while the capacity utilization rate came in at 75.5%.

Fed head Yellen’s testimony – In contrast to the BOC’s dovish tone, Fed head Yellen sounded chipper in her latest testimony, fueling market expectations for another rate hike by the end of the quarter.

Yellen discussed how the U.S. economy is close to achieving the Fed’s two goals of 2% inflation and full employment so the next hike depends on whether or not these improvements are sustained in the coming months. She explained that it makes sense to gradually reduce monetary support since waiting too long to tighten could eventually force the Fed to hike aggressively, which might then push the economy back in recession.

Major Market Movers:

USD – The Greenback was the top performer of the day, supported by good data and hawkish remarks from the Fed head.

USD/JPY popped up from 113.30 to a high of 114.84, EUR/USD retreated from 1.0700 to the 1.0630 area, GBP/USD dropped from 1.2310 to 1.2260, and USD/CHF recovered to 1.0080.

CAD  The Loonie was forced to sit on the losers’ bench when the BOC didn’t sound as upbeat as many expected.

USD/CAD rallied from a low of 1.0355 to 1.3230, CAD/JPY tumbled from 86.60 to a low of 85.68, EUR/CAD rose from the 1.3950 area to a high of 1.4143, and GBP/CAD is up to the 1.6250 minor psychological mark.

Watch Out For:

See also:

London Session Recap

Asian Session Recap

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