Warnings about euro appreciation kept the shared currency in a downbeat mode for the rest of the U.S. session while a few other major currencies enjoyed a bit more volatility.
In particular, the Loonie spiked this way and that ahead of the BOC decision but managed to hold its ground. The U.S. dollar staged a decent rebound later in the day on hawkish Fed commentary.
- BOC hiked interest rates by 0.25% as expected
- BOC: Uncertainty about NAFTA weighing on outlook
- U.S. capacity utilization rate up from 77.2% to 77.9% vs. 77.3% forecast
- U.S. industrial production increased by 0.9% vs. projected 0.4% gain
- Fed official Evans: Strong growth expected this year, tax cuts to boost business investment and jobs
- Fed official Kaplan: Base case for 2018 is three rate hikes, tax cuts to bring unemployment down to 3%
- Fed Beige Book: Most districts saw modest to moderate growth
- Beige Book: Labor market tightening, wages rising
BOC statement & presser
Loonie bulls seemed eager for a BOC hike during the New York session as they pushed the currency higher even before Governor Poloz stepped up to the podium. The central bank delivered a 0.25% increase in rates as expected and Poloz said that this decision was a no brainer.
However, the start of their official statement cited concerns about NAFTA as losing this trade agreement could put a significant dent on trade and business activity. Officials already mentioned some concerns about weak exports, particularly in cross-border shifts on automotive production.
Nonetheless, the announcement went on to confirm that the Canadian economy is seeing strong data, with inflation edging close to target. It also cited how consumption has been stronger than expected, which is indicative of upbeat labor market conditions.
Moving forward, policymakers expect consumption and residential investment to contribute less to growth as borrowing costs rise but that business investment would make up for it. Again, they shared concerns about NAFTA-related uncertainty:
“However, as uncertainty about the future of NAFTA is weighing increasingly on the outlook, the Bank has incorporated into its projection additional negative judgement on business investment and trade.”
In the end, the BOC reiterated that they will be cautious about future tightening and concluded that:
“While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target.”
What eventually drove the Loonie higher towards the latter part of the trading session were remarks from BOC head Poloz and policymaker Wilkins during the press conference.
In particular, they both talked about the dangers of tightening too slowly and risking an inflation buildup.
Hawkish Fed rhetoric
Fed tightening expectations resurfaced towards the end of the U.S. session after the Beige Book was released and a couple of non-voting members shared more hawkish views.
The Beige Book indicated that 11 out of 12 Fed districts saw modest to moderate growth, with more signs of jobs momentum and wage growth. In addition, the outlook for the year remained optimistic for most districts.
As for inflation, most districts reported modest to moderate price growth as well. There were stronger pressures in manufacturing, construction, or transportation input costs.
Meanwhile, Fed official Evans who voted against a hike in December shifted to a more upbeat tone in saying that strong growth is expected this year, owing mostly to the boost in business investment from tax cuts.
Fed official Kaplan echoed this positive sentiment on tax reform by saying that it could even drive unemployment down to 3% by the end of the year. He also cited that three rate hikes is the base case for 2018.
FOMC voting member Mester later on said that she expects more contribution to growth from the tax overhaul from her initial estimate of 0.25 to 0.5 percentage points in growth.
Major Market Mover(s):
The shared currency kept reeling from jawboning remarks of ECB officials in the previous trading session that cast doubts on the central bank’s potential tightening moves.
EUR/USD slid from a high of 1.2288 to a low of 1.2177, EUR/JPY resumed its drop from the 136.00 area to 135.46, EUR/GBP continued to slump to a low of .8819, and EUR/AUD slipped to a low of 1.5265.
There was a bit of choppiness among Loonie pairs a few moments before the BOC announcement, leading some analysts to speculate about leakages.
The Canadian currency barely established any direction during the actual announcement, holding out for a few more upbeat remarks during the presser instead.
USD/CAD spiked up to a high of 1.2533 then to a low of 1.2366 before ending at 1.2427, CAD/JPY dropped to a low of 88.27 then recovered to 89.65, AUD/CAD is down from a high of .9985 to a low of .9865.
Dollar bulls were off to a late start but still allowed the U.S. currency to end in the black against some of its peers.
USD/JPY dipped to a low of 110.59 before recovering to 111.35, USD/CHF found support at .9585 then rallied to a high of .9659, EUR/USD slid back to the 1.2200 area, and AUD/USD pulled back from a high of .8023 to a low of .7953.
Watch Out For:
- 12:30 am GMT: Australian jobs report (13.2K increase in hiring, 5.4% jobless rate expected)
- 4:30 am GMT: Japanese revised industrial production
- 7:00 am GMT: Chinese GDP q/y (drop from 6.8% to 6.7% expected)
- 7:00 am GMT: Chinese fixed asset investment ytd/y (drop from 7.2% to 7.1% expected)
- 7:00 am GMT: Chinese retail sales y/y (dip from 10.2% to 10.1% expected)
- 7:00 am GMT: Chinese industrial production y/y (no change from 6.1% expected)