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The FOMC minutes cast some doubts on a June interest rate hike due to the slowdown in Q1 while the BOC whistled a more upbeat tune during their policy statement.

  • BOC kept interest rates on hold at 0.50% as expected
  • BOC: Economic data has been encouraging, inflation almost in line with projection
  • BOC: Monetary policy stance is still appropriate for the time being
  • FOMC minutes outlined plans for balance sheet reduction
  • FOMC: Gradual pace of tightening needed, hike could be seen “soon”
  • FOMC: Wait for more data to ensure that Q1 slowdown is transitory?
  • U.S. crude oil inventories down by 4.4M barrels vs. projected 2.4M drop

Major Events:

BOC surprisingly optimistic in rate decision

My buddy Forex Gump hinted that the BOC statement could go either way as the latest batch of reports were a mix of good and not-so-good, but trust the Canadians to see the glass half-full!

As expected, the Bank of Canada kept interest rates on hold at 0.50% for now, signaling that their current monetary policy stance is still appropriate for the time being. The statement also acknowledged that economic data has been encouraging as the labor market continues to show improvements while consumer spending has been robust. Even though Canada’s CPI fell short recently, policymakers judged that inflation is almost in line with their projection.

Still, BOC officials noted that their three measures of core inflation are below 2% and that wage growth has been subdued, hinting at potentially weaker price pressures down the line. They also warned that this second quarter could chalk up moderate growth compared to Q1 but expressed confidence that global economic growth continues to gain traction.

FOMC minutes cloud June expectations

Think a June rate hike is in the bag? Think again! As it turns out, several members of the FOMC are still feeling concerned about the growth slowdown in Q1, citing that it would be prudent to wait for more data before deciding to tighten again.

In the minutes of the May Fed meeting, policymakers judged that the Q1 rut is probably transitory and might not drag their medium-tier growth outlook down. A number of committee members predicted that consumer spending would rebound in the coming months and that inflation would continue to show progress in hitting their 2% goal.

A large part of the discussions also focused on balance sheet adjustments, particularly on the staff’s detailed outline for a gradual phaseout of reinvestments that featured a gradually increasing reduction cap. In other words, the central bank would offload its holdings at an accelerating pace to mop up excess liquidity in the markets, essentially having a similar effect as tightening.

Because of that, analysts remarked that the outlook past the June FOMC decision looks a bit more cloudy owing to this balance sheet reduction later in the year, possibly giving the Fed less reason to hike again.

Major Market Movers:

USD

Dollar bulls were unimpressed by the FOMC minutes as policymakers showed weak conviction about future tightening moves.

USD/JPY slipped from a high of 112.16 to a low of 111.48, EUR/USD advanced from a low of 1.1168 to a high of 1.1231, USD/CHF retreated from .9767 to .9732, and GBP/USD is up to 1.2973.

CAD

Loonie traders were mildly surprised to get optimistic remarks from the BOC while the larger than expected draw in U.S. stockpiles gave the oil-related currency an additional boost.

USD/CAD tumbled from 1.3508 to a low of 1.3405, CAD/JPY popped up from 82.80 to a high of 83.42, EUR/CAD is down to 1.5051, and GBP/CAD is down to the 1.7400 mark.

Watch Out For:

  • 3:00 am GMT: New Zealand annual budget release