BoC Preview: What To Expect From USD/CAD

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

The traded higher against all of the major currencies Tuesday as stronger U.S. data, a gap higher in the and uptick in revive demand for the USD. No news is also good news for the greenback as the lack of antagonistic tweets from President Trump toward Russia and China allowed the dollar to rise. and rose more than expected. Although fell short, they still increased from the previous month. The Federal Reserve’s is schedule for release Wednesday and chances are they will report ongoing improvements in the U.S. economy. With all of this in mind, the dollar’s rally is modest, as investors have grown weary of geopolitical risks.

Meanwhile, Wednesday’s main focus will be the Bank of Canada’s . No policy changes are expected but the ’s price action tells us that investors are looking for positive from the central bank. A lot has changed since their last meeting in March. Six weeks ago, they expressed concerns about lower wage and household credit growth but since then, hit a 3-year high, rebounded, the declined, accelerated, improved, increased and expanded at healthy rate. Both U.S. President Trump and Canadian Prime Minister Trudeau have said they are close to reaching a NAFTA deal and according to Mexico’s Economy Minister, the negotiation team could meet again on Thursday in Washington to start working on their issues again and hopefully move the process forward. The bottom line is that the BoC has less to worry about, especially after the uptick in the . According to the central bank’s own survey of executives, expectations for future sales improved with companies seeing continued signs of healthy sales, capacity constraints and labor pressures. Hopefully this will alleviate one of the BoC’s concerns about wage growth.

There are 2 main focuses on Wednesday – the Bank of Canada’s and the tone of Governor ’s press conference 75 minutes later. While we haven’t heard from Governor Poloz in a few weeks, we are looking for optimism all around. Investors are not looking for another rate hike until July at the earliest so if the BoC is less cautious and more optimistic, we should see break 1.2500. However if they maintain cautiousness in the face of improving data, this is a strong indication that they have no immediate plans to raise interest rates and could hold off to the fall depending upon how things progresses. In this case, profit taking on short USD/CAD positions could drive the pair as high as 1.2700.

The and dollars sold off against the greenback following softer Chinese data. Although in China rose more than expected, growth slowed to 1.4% from 1.6% QoQ. The held steady at 6.8%. growth slowed to 6% from 6.2%. The Reserve Bank of Australia’s did not have a significant impact on the currency. NZD shrugged off higher . No major economic reports were expected from either country Tuesday evening.

The pressure on and were exacerbated by weaker data. It should be no surprise that investor confidence slumped in April. For the first time since July, turned negative and dropped to its lowest level since 2012. The remained positive but still slipped from 13.4 to 1.9. While the Eurozone economy is slowing from elevated levels the consistency of the deterioration is worrying the central bank. Sterling’s rally was halted by weaker . rose less than expected and the fell to a new cyclical low of 4.2%. But as we said in yesterday’s note, the primary focus was on wages. Unfortunately average weekly earnings did not accelerate to 3% like economists hoped but instead held steady at 2.8%. remains in play on Wednesday with U.K. scheduled for release. Price pressures are expected to ease and if it does, it would accelerate the losses in GBP/USD. Investors think that the Bank of England will raise next month but they need to see data validate that view before extending the pair’s gains.