The Canadian dollar retreated at the start of the week as it gave up the gains from Friday’s strong inflation and retail sales data. The loonie had a horrible start to 2016 after the price of oil tumbled taking along the currency. The actions from Organization of the Petroleum Exporting Countries (OPEC) members and Russia to seek an oil output freeze has stabilized the price of crude.
The Bank of Canada (BoC) was proactive in 2015 with two rate cuts after rightly calling for the crash in oil prices but even the economists at the central bank could not have forecasted the accelerated drop in January of 2016. When parts of the market looked to the BoC to again take the reigns with another rate cut, governor Stephen Poloz decided instead to keep rates steady and hold until the Liberal government issued its first budget. The budget relies on fiscal stimulus and that alone sets it apart from other major economies that have pursued easing policies to boost growth with mixed to poor results.The USD/CAD gained 0.163 percent in the last 24 hours. The USD is having a mixed results trading day with the Canadian dollar one of the losers after investors took profits after a strong economic data releases. The USD/CAD is trading at 1.2688 with little guidance from data.
Central bank governor Stephen Poloz will host a press conference in New York as part of the Canada-US Securities Summit on Tuesday, April 28. The BoC staff has been clear to praise the efforts to diversity fate economy from its reliance on natural resources. The Federal Open Market Committee (FOMC) meeting on Wednesday is the biggest event this week. The U.S. central bank finally raised rates in December of last year, but has had to downgrade its number of hikes forecasts after the global economy has slowed down and impacted the pace of the American economy. The Fed has the luxury of patience.
The International Monetary Fund (IMF) has criticized the use of endless supply of monetary easing from central banks that have kept rates artificially low for too low, but at the same time warning the Fed that it is not necessary to raise for the sake of raising rates. The paradox of long term low rates and no need to raise will not be solved this week when the Fed is widely expected to keep rates unchanged and issue very few insights on the June FOMC meeting. The summer meeting is a strong possibility of welcoming a rate hike on two factors alone. It has a press conference, not an official requirement, but the central bank is more likely to want to explain the rationale behind such an important decision. The U.S. election cycle will not be in the final stretch, which would complicate a fall (September) hike.
The Bank of Japan will follow the Fed this week in what the markets are anticipating will be another intervention to weaken the JPY and find a way to boost the Japanese economy out of the deflation spiral. The prescription from the BOJ to cure the ails of the Japanese economy is not working, but that has not changed the playbook going forward. In fact that government has already backtracked from pushing forward more fiscally responsible (but unpopular) sales tax hike.
Canada is seen as a pilot program of a fiscal stimulative effort that does not rely on the central bank’s printing press to save the day. The ECB, the BOJ and the Fed to some extent are living proof that low rate environment addiction does not result in a stronger economy. The BOC is expected to keep rates steady for the remainder of the year as the results of the stimulus package from Ottawa starts trickling down the economy.
CAD events to watch this week:
Tuesday, April 26
8:30am USD Core Durable Goods Orders m/m
8:55am CAD BOC Gov Poloz Speaks
10:00am USD CB Consumer Confidence
Wednesday, April 27
10:30am USD Crude Oil Inventories
2:00pm USD FOMC Statement
2:00pm USD Federal Funds Rate
Thursday, April 28
1:00am JPY BOJ Outlook Report
Tentative JPY BOJ Press Conference
8:30am USD Advance GDP q/q
8:30am USD Unemployment Claims
Friday, April 29
8:30am CAD GDP m/m
Saturday, April 30
9:00pm CNY Manufacturing PMI
*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar
About Alfonso Esparza
Senior Currency Strategist, OANDA, Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, he established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto. Follow on Twitterand on his Google+ profile.