- USD / CAD experiences significant selling pressure in the immediate aftermath of the Bank of Canada meeting on Wednesday.
- The pair falls from close to 1.2700 to almost as low as the 1.2600 level, before recovering to 1.2650.
- Low inflation figures have done little to hurt demand for the loonie.
USD / CAD has experienced significant selling pressure on the heels of Wednesday’s most optimistic monetary policy decision from the Bank of Canada. The pair fell from pre-release levels of 1.2700 to almost as low as the 1.2600 level, before cutting losses to rebound near 1.2650. In the slide, the Canadian dollar has reached its highest levels in almost three years against the US dollar.
On the day, the pair loses 0.7% or just over 90 pips, unaffected by a general decline in consumer price inflation in December, which is considered temporary as a result of the short-term impact of new concerns. / crashes due to virus. In fact, Capital Economics expects core inflation to rise above 2% in the summer.
Summary of the Bank of Canada meeting
Even though some analysts and money markets they expected some probability that the Bank of Canada would opt for a “mini” rate cut and lower interest rates to 0.1% (as the BoE and RBA did in 2020), the bank chose to stay firm with rates of 0.25%. The central bank reiterated its interest rate guidance. “The Governing Council will keep the policy interest rate at the effective lower limit until the economic slack is absorbed so that the inflation objective of 2% is achieved in a sustainable way. In our projection, this will not happen until 2023 ”.
Meanwhile, the pace of monthly asset purchases was unchanged at C $ 4 billion per week. However, the bank said it would slow down the pace of purchases as Governing Council members gain confidence in the strength of the economic recovery.
Regarding the economic outlook, the central bank was relatively optimistic. The bank acknowledged the deterioration in the short-term economic outlook as a result of the increase in Covid-19 cases, but noted that “the outlook is now stronger and safer … thanks to earlier-than-expected availability of vaccines and a major policy stimulus underway. “
At the press conference, Governor Tiff Macklem noted that if the economy turns out to be substantially weaker than the bank currently projects, leading to greater disinflationary pressures, there would be the option of adding more stimulus. When asked if the bank had considered the micro-cut some analysts were expecting, Macklem has said that the Governing Council had determined that the current “substantial” amount of stimulus currently in place was sufficient, but that a micro cut might be an option later on.
When pressed to talk about the recent appreciation of the loonie, Macklem noted that it was a risk to the outlook, but did not go further (that is, by hinting that the bank might seek to take steps to actively weaken the CAD) . U.S. Treasury Secretary Janet Yellen’s testimony to Congress on Tuesday, in which she issued a warning to America’s top trading partners not to actively seek to weaken their currencies, was likely fresh on the minds of the BoC politicians.
A new monetary policy report filled with new economic forecasts was also released. The bank expected the year-on-year GDP growth rate in the first quarter of 2021 to be -2.5% and the bank’s forecast for full-year 2021 growth was lowered to 4.0% from 4.2% to reflect this initial weakness. However, the central bank’s forecast for 2022 received an improvement to 4.8% from 3.7% and GDP growth for 2023 was forecast at 2.5%. The inflation forecast for 2022 was unchanged at just 1.7%, still below the bank’s 2.0% target.
The fact that the central bank did not cut rates to 0.1% (and a part of the market was betting they would), the more optimistic tone on the longer-term economic outlook, and the fact that the bank signaled that soon could move towards a gradual reduction of its asset purchase program worked in favor of the Canadian dollar, which helped propel USD / CAD to fresh multi-year lows just above the 1.2600 level.
USD / CAD bearish bias intact
The USD / CAD bearish bias remains intact. The pair continues to move down within the bounds of a long-term downtrend channel. To the upside, price action is constrained by a trend line linking the highs of November 13 and 23, December 21, and January 11 and 17, while on the downside, price action is being supported. by a downtrend that joins the lows of early October, November 10 and the lows of mid-December. So, technically speaking, a continued move towards the 1.2500 level seems the most likely outcome.
USD / CAD 4-hour chart