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Market Analysis

Fundamental Analysis: CAD Volatile ahead of Poloz’s Speech

February 21, 2019
BY Michael Stark

The Canadian dollar has been unstable in many of its pairs this week as markets await the speech tonight from the BoC’s Governor, Stephen Poloz. In the absence of significant economic data from Canada this week, a jittery WTI is the main factor behind CAD’s volatility.

The negative direction for USDCAD has ceased for now, although a move back above C$1.32 was rejected earlier this morning. The euro has been more volatile today, though, currently at around C$1.495. Meanwhile CAD has struggled to make headway against the yen beyond ¥84.

Weaker US dollar and overall gains for WTI

A broadly weaker US dollar this week had helped CAD to make some gains against most majors. However, WTI holding until earlier today around $56.50 acted against any major strengthening for the Canadian dollar. As the world’s seventh-largest producer of oil, Canada’s economy and currency are closely linked with fluctuations in the price of crude.

The impact of ongoing Sino-American trade talks on CAD remains somewhat uncertain. This morning’s news of commitments in principle on some of the biggest issues between the two superpowers has been very positive for sentiment. Ultimately, an agreement would need to be reached for this factor to boost the Canadian dollar as opposed to causing volatility.

Rates also remain an important issue. Minutes from the USA’s Federal Open Market Committee indicated the desire for ‘patience’ in raising the funds rate again. Depending on Dr Poloz’s comments tonight, the Fed’s relative dovishness might be a positive factor for CAD. The differential between the Fed and the BoC which is currently 0.5-0.75% has been key for USDCAD especially.

Poloz’s speech is the main event for CAD

Stephen Poloz, the governor of the Bank of Canada, is giving a speech and press conference at the Chamber of Commerce of Metropolitan Montreal tonight from about 17.30 GMT. The speech will be webcast by the Bank of Canada.

As is usual with such speeches, traders will be looking for Dr Poloz’s reactions to recent factors affecting the price of CAD. These include inflation, oil, rate differentials with the USA and other economic data.

Overall, one might expect some positivity, and maybe even a hint of a rate hike this year. Unemployment of 5.8% in Canada remains very close to 35-year lows. Meanwhile annual inflation is on target at 2%. How much stress Dr Poloz might put on these and other positive figures is a key area of focus for CAD traders this evening.

More volatility in store for the loonie

CAD is likely to be highly active but without a clear direction around Dr Poloz’s comments tonight. The Canadian dollar’s movements into the end of the week depend on what he says and the price of WTI. However, some minor overall losses are perhaps the most probable outcome.

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