The Bank of Canada decided once again to hold its target overnight interest rate at 0.5%. The overall message from the statement on monetary policy is that economic developments are unfolding just as the Bank expected back in January. With the Bank expecting global growth to strengthen through at least 2017 and anticipating a continuation of the U.S. economic recovery, the Bank signals that further rate cuts are not needed in the short or intermediate-term. On balance, the reported resiliency in Canada's economic conditions support a stabilization in rates:
"Canada's GDP growth in the fourth quarter was not as weak as expected, but the near-term outlook for the economy remains broadly the same as in January. National employment has held up despite job losses in resource-intensive regions, and household spending continues to underpin domestic demand. Non-energy exports are gathering momentum, particularly in sectors that are sensitive to exchange rate movements. However, overall business investment remains very weak due to retrenchment in the resource sector."
The Canadian dollar (NYSEARCA:FXC) strengthened as if to confirm the implication that the Bank of Canada is done with rate cuts. The chart below shows that the decline in USD/CAD has essentially confirmed overhead resistance at the 200-day moving average (DMA). USD/CAD is now trading below its level when the Fed hiked rates in December; the pair is also right back where it stood for the Bank of Canada's December statement on monetary policy. This move was quite the roundtrip!
USD/CAD breaks down to a near 4-month low as the 200DMA holds firm as overhead resistance.Source: FreeStockCharts.com
The Bank of Canada attributed recent strength in the Canadian dollar to the recent recoveries in the prices of oil and other commodities and shifting expectations for monetary policy in both the U.S. and Canada. By omitting any commentary on the market's expectations for policy in Canada, I am assuming the Bank is comfortable with expectations for rate stabilization. The catalysts for the Canadian dollar have clearly outweighed those for the U.S. dollar even as expectations for the next Federal Reserve rate hike have finally crept back into 2016 and have marched ever earlier into the year. The Bank of Canada intimated its comfort with current levels for the Canadian dollar by stating "…both the price of oil and the exchange rate have averaged close to levels assumed in the January MPR."
Scope remains for more strength in the Canadian dollar as speculators continue to unwind net shorts. Net positions are near the last trough although open interest is much higher. I will be looking for the next report on speculative positions to decline further and provide additional confirmation of waning expectations for more rate cuts from the Bank of Canada.
Speculators were last net long the Canadian dollar for two weeks in May, 2015. The current retreat from net short positions looks very similar to the retreat coming off the August Angst in 2015.Source: Oanda's CFTC's Commitments of Traders
Be careful out there!
Disclosure: I am/we are long FXC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.