For the second day in a row, the Canadian dollar is starting the day on a positive note. What a difference a few days makes. USD/CAD soared to 1.3385 after the text of Bank of Canada (BoC)Governor Stephen Poloz’s speech from Victoria, B.C. was released on Wednesday afternoon.
Economists and analysts were not in total agreement as to whether the speech and ensuing press conference were hawkish or dovish on the outlook for Canadian interest rates. Many mocked the governor for giving a speech on transparency which in reality wasn’t transparent at all.
To be fair, Poloz stressed that the BoC cannot make policy on headlines but must rely on data. To that end, the BoC will get a couple of key data points this morning. First April gross domestic product data will be released. The market expects a flat result (0.0%) compared to the 0.3% gain in March. The Raw Materials Price Index (forecast 1.2% vs April 0.7%)) and Industrial Product Prices (forecast
0.9% vs April 0.5%) are also due. If this data surprises to the upside, the Canadian dollar will soar.
However, the gains may be short-lived. The Quarterly Business Outlook Survey (BOS) is released a couple of hours later. While the previous data is backwards-looking, the BOS survey is forward-looking. 100 business executives are surveyed for their short-term outlook on the domestic economy. Traders (and the BoC) will analyze the report for evidence that recently elevated trade tensions and the implementation of steel and aluminum tariffs have reduced investment and hiring intentions. If so, the Canadian dollar will come under renewed pressure.
The overnight rally in the Canadian dollar was due to offshore developments rather than from domestic influences. Nevertheless, the Canadian dollar is the only major G-10 currency to have posted again against the U.S. dollar this week. It managed to rise 0.4%.
EUR/USD is unchanged from Monday’s Toronto open until today at 6:00 a.m. EDT. The New Zealand dollar was the weakest currency, dropping 1.95% due to a dovish Reserve Bank of New Zealand policy statement.
The Canadian dollar may have been the best performing major G-10 currency this week, but it is the second weakest currency since the January 2 opening level, having shed 5.5%. Despite the BoC’s assurances that monetary policy decisions are data dependent, it cannot ignore the risks from U.S. trade actions. A July rate increase is far from a "done deal." Until the trade issues are resolved, Canadian dollar gains will be limited.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians.
