Canada's central bank is sticking with its 2% inflation target for another 5 years, saying the well-established mandate remains the best way to support a weak economy. BoC acknowledged it studied the possibility of raising the target, which theoretically could give more room to add stimulus. The costs of change, however, were deemed too high. Positive US data reports this week should serve to bolster expectation that the Fed will be comfortable nudging monetary policy a little higher in December.
Yesterday, USDCAD climbed from 1.3110 up to 1.3214 before falling back to 1.3170. From there it was a
steady climb to 1.3230 in late North American trade. The CAD has been the worst performing currency
since reaching multi-week highs vs. most currencies after Wednesday's Bank of Canada statement and oil
inventory data. (USDCAD tested 1.3010) The weakness stems from dovish comments from the Bank of
Canada Governor Poloz. USDCAD tested 1.3260 overnight before falling back to 1.3228 ahead of this
morning's data releases. Retail sales missed estimates while inflation data improved from last month. Core
data (used by the Bank of Canada for setting monetary policy) was as expected while headline data missed
slightly. This was enough to send USDCAD up to 1.3350. The previous highs of 1.3314 and 1.3307 were
effectively taken out opening the door for further upside from a technical standpoint. The pairing has since
fallen back to 1.3305 followed by a 2nd run which stalled at 1.3340. We are now near 1.3320.
Stock markets inched higher but the Mexican peso was mixed after the third and final U.S. presidential debate, which was judged to have given no clear boost to Donald Trump's hopes of winning the White House. The peso is seen as the chief proxy for market pricing of the Republican candidate's chances in view of his promises to impose tough limits on immigration. It climbed to a six-week high against the dollar in the immediate aftermath of the debate but was down on the day in European trade. A win for Democrat Hillary Clinton next month - now predicted clearly by polls - is also seen as opening the way for a rise in interest rates which a number of U.S. Federal Reserve policy makers have all but promised for December.
As expected, The Bank of Canada announced today that it is maintaining its target for the overnight rate at 0.50%. They commented that the economy is working its way back from shock and that it's on track for a 2nd half rebound on stronger exports. The CAD has dropped since the BoC press conference where they actively discussed adding more monetary stimulus. Meanwhile, oil has broken to its highest level since July after a surprise drawdown in US energy supplies. If crude can hold these levels or close above $52, it sets up a continued rally, maybe even to $60 or better.
Rising commodity prices pulled shares higher on Tuesday and the dollar slipped from a seven-month high as bond yields fell, while sterling briefly strengthened after data showed UK inflation rose by its most in more than two years last month. The weaker dollar helped lift oil and metals prices, lifting commodity related stocks in Europe Asia and North America. Sterling hit a six-day high before retreating, after data showing annual consumer price inflation in Britain accelerated to 1.0 per cent last month from 0.6 per cent in August.
China's September trade data flashed another weak signal for the global economy. China reported a USD 41.99 billion trade surplus for September, compared to a USD 59.60 billion surplus a year earlier and missing market estimates of a USD 53.0 billion surplus. It was the smallest trade surplus since March as exports fell much more than imports.
USD/CAD dropped 0.2% after reaching the highest level in almost 7 months on Oct.13. Government bond yields climbed around the world after Friday's comments by Federal Reserve Chair Janet Yellen fueled bets that US policymakers may be prepared to tolerate faster inflation in the interest of a more emphatic economic recovery.
Steve Brown, Senior Corporate Trader | Stevebrown@vbce.ca
It was another strange week for the CAD. After closing last Friday on a weak note despite substantial gains in oil and surprisingly strong employment data, fundamentals took over with the CAD immediately gaping higher in Sunday's open. The CAD continued to make gains through Monday's North American holiday session. The trend abruptly changed between Tuesday and early Thursday as USDCAD tested 1.3307 after having tested 1.3314 last Friday. From there, fundamentals took over once again sending the pairing down to 1.3103 earlier today. The CAD was the best performing currency and finishes the week near its strongest point vs. most major currencies.
Overnight, USDCAD briefly popped back above the 1.32 level only to fall to 1.3153 ahead of the U.S. data releases. A quick move up to 1.3180 was followed by a decline to 1.3132 – a two week low for the pairing. Corrections have been limited to 1.3150 thus far. The EURCAD rate has declined towards a 2 month low while the JPY is near a 1 month low.
World stocks stumbled to three-week lows on Thursday and developed market bond yields dipped, after Chinese data showed a sharp decline in exports, reviving concerns about the health of the world's second-biggest economy. Riskier assets have had a difficult few weeks, undermined by concerns about a potential rise in U.S. interest rates, the outcome of U.S. elections, Britain's departure from the EU and the health of German and Italian banks. The Canadian dollar is holding close to session highs before the release of Oil inventories.
The USD held near a 2 month high and Treasuries slid as traders await minutes of the Federal Reserve's latest policy meeting that may provide clues on the path of the U.S. interest rates. Recent economic data beating forecasts and comments by Fed officials have fueled bets that the central bank is on path to increase rates this year. Investors currently assign about a two-thirds chance of a December rate increase, based on prices in federal fund futures contracts, and a less than 20% chance of a move next month. Sterling lost significant ground yesterday but recovered a good deal of those losses so far today.