The Bank of Canada released its Monetary Policy Report which shows that Canada’s economic growth has moderated, and the economy is operating close to capacity. While moderation was anticipated, temporary factors – notably, volatility in trade shipments, amplified by transport bottlenecks, and the dynamic response of housing markets to regulatory changes – are resulting in sizable short-term fluctuations in growth. The BoC further reiterated that borrowing costs will eventually rise but not as quick as initially indicated, as the Canadian economy still has yet to reach the top end of the inflation band.
Oil prices have jumped again, today’s oil inventory numbers fell for the first time in six weeks, giving further strength to oil, also, OPEC and Russia will meet in Saudi Arabia this week, while looming political crises threaten to tighten supplies further, the group seems determined to keep its cuts in place.
USDCAD 1.2620, 1.2600, 1.2585 1.2648, 1.2667, 1.2685
USD-CAD has rebounded back above 1.2580 after posting a two-month low at 1.2517 yesterday. The pair still remains in an overall down trend. A 8% surge in oil prices over the last week to 40-month highs has given the Canadian dollar a boost, helping offset disappointment from the news that an announcement on the NAFTA renegotiation will be delayed. The latest price action in USD-CAD affirms a downside trend that’s been developing over the last three weeks, from levels above 1.3100, and we expect more downside. Resistance is at 1.2613-15. The BoC meets on policy today. Our projection remains for no change to the 1.25% rate setting, along with a cautiously constructive growth outlook salted with trade uncertainty. An as-expected outing would maintain the base-case for further gradual rate hikes this year. The BoC will also release the Monetary Policy Report. GDP is on track to undershoot the BoC’s 2.5% estimate in Q1 (we see +1.5%), so it will be interesting to see how they view growth prospects for this year and next.
EUR-USD is softer today, and while rebounding quite sharply from two separate dips below the 1.2350 level during the European AM session, the pair has remained comfortable off the three-week high posted yesterday at 1.2414. Eurozone March HICP data was revised down to 1.3% y/y from 1.4% y/y, which follows yesterday’s sub-forecast German ZEW survey, putting a lid on euro buying as the report further developed an economic-slowing theme in the Eurozone’s engine economy. In the bigger view, EUR-USD remains near the midway levels of a broad consolidation range that’s been seen for some two months now, which has followed a 14-month rally phase from sub-1.0500 levels. More of the same seems likely, with the odds for a big-picture breakout seeming low at the present time. Near-term risks look to be skewed to the downside. Initial support is at 1.2325-26.