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Market Analysis

Fundamental Analysis: CAD Weakens Ahead of the BoC’s Meeting

April 24, 2019
BY Michael Stark

The Canadian dollar has declined significantly today as traders await news from the Bank of Canada (BoC). The central bank releases its monetary policy report and decides on rates at 14.00 GMT. Expectations for a more dovish outlook from the BoC are probably the most important factor in recent losses. Conversely, recent economic data has been generally positive.

The US dollar reached the 6-week high of C$1.345 in the early afternoon GMT. The euro’s gains were more limited though, at $1.508. The Canadian dollar also fell against the yen to around ¥83.14, at the time of writing.

Loonie could be hit by BoC’s negativity

The increasingly low chance of a rate hike by the Bank of Canada in 2019 is one of the most important downward pressures on the loonie. Generally mixed data from the most important releases of the year, so far seems to support analysts’ consensus that the BoC will be less positive today.

The unusual fundamental factor in CAD’s recent losses is the strong gains recently for oil. American light oil reached new 2019 highs yesterday, trading for a period above $66.50 for a barrel. The Canadian dollar’s correlation with oil is usually an important driver for the currency. This is because of the role that exports of crude play in Canada’s economy.

Rates are a crucial fundamental support for USDCAD. Based on the large majority of expectations, the differential is likely to remain 0.5-0.75% for the rest of the year. Despite CADJPY’s importance for the carry trade, there is the possibility of another ‘flash crash’ during Japan’s upcoming long holiday. Volumes and liquidity for this pair will probably remain low over the next couple of weeks.

Relatively strong data last week

Even though there is considerable pessimism among many traders and analysts regarding the Canadian dollar, the fact remains that recent data from Canada has been good overall. Last week’s inflation figures both met the consensus, with the annual figure of 1.9% beating the previous release by 0.4%.

Canada’s balance of trade for February also came out last Wednesday, indicating a significant decrease in the deficit to C$2.9 billion. This is better than the forecasts by about a billion. The only significant negative in recent Canadian data was Thursday’s employment change. This job data missed the consensus by a few thousand but was still a positive figure.

Possibilities for CAD at today’s meeting

The universal expectation is for no change to the target overnight rate this afternoon at 14.00 GMT. However, the BoC might hint or even state that no rate hike is planned for 2019. CAD would be likely to make sharp losses in such a situation.

This means that traders will probably focus on the monetary report and press conference (14.15 GMT). In both cases, the potential of the bank to surprise – as it has done rather often over the past few years – is very high. Comments on the outlook for growth, oil’s relationship to the loonie, and of course domestic data are critical for CAD’s direction.

High volatility probable, but limited downside

This afternoon’s events are the decider for which direction CAD might take over at least the next few days. However, the Canadian dollar is strongly oversold in most of its pairs at the moment. While it is certainly possible that the BoC might be negative as expected, further significant losses for the loonie are unlikely.

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