the daily chartist

UCD/CAD recap for 20.01.2016 and BOC aftermath

published 4 years ago

Yesterday the Loonie held on to its name as it tumbled up and down as the news came in for the BOC rate, statement and Poloz's speech. A brief recap on the expectations:

  • Even higher volatility with the news flowing
  • Rate cut from 0.50% to 0.25%
  • Comments on the inflation, oil prices and US economy
  • USD/CAD dropping at least 100 pips

 Rate decision came in first and it showed a rate hold at 0.50%. Even higher volatility? Check. Rate cut? Not yet. USD/CAD dropping 100 pips? Well it dropped 130 pips. Candle on the M15 chart opened at 1.46201, no high, instant drop to rock-bottom at 1.44909 and slightly rebounded for a close at 1.45060. Oil gained some ground as well, but then resumed its way south, as USD/CAD turned north. Price found a strong support at 1.44909, erasing the rate reaction with 142 pips movement with 3 candles, and the real whip-saw began for several minutes in a formed range between 1.45928 and 1.45717. Afterwards, price finally broke 1.45717 and continued its slide in the Asian session. 

 Highlights of the Bank of Canada decision:

  • Prior overnight rate was 0.50%
  • Risk to inflation profile are balanced
  • Sees 1.4% growth in 2016 vs 2.0% previously
  • Sees 2.5% growth in 2017
  • The Bank's current base case projection shows the output gap closing later than was anticipated in October, around the end of 2017
  • Price for oil and other commodities have declined further and this represents a setback for the Canadian economy
  • The dynamics of the global economy are broadly as anticipated
  • The protracted process of reorientation towards non-resource activity is underway
  • The outlook is highly uncertain
  • BOC now estimates that real GDP growth stalled in the fourth quarter
  • USD/CAD was trading at 1.4618 moment before decision

 Comments? Check. Risk of inflation "roughly balanced" isn't dovish. However, saying the output gap will close around end of 2017 compared to around mid-year in the October MPR so that is a bit more dovish. Still, it doesn't imply much more easing. Full MPS report from BOC.

 In its details it seems less dovish. A key appendix from the full MPR report sums up the situation: 

(iii) Lower oil prices and threshold effects

"Given the magnitude of the oil price decline, it is becoming increasingly likely that important adverse threshold effects on economic activity may occur. If prices were to fall to a sufficiently low level that a firm had difficulty covering ongoing operating costs (i.e., average variable costs), then not only would investment and employment be affected, but the firm could also stop operation and be forced into bankruptcy. The relevant threshold differ across firms. If a significant part of the industry were affected by thresholds, the resulting negative confidence effects and demand spillovers could weigh heavily on the broader economy."

 Highlight of Bank of Canada Governor Stephen Poloz's press conference:

  • Must be mindful that further rapid CAD depreciation could push overall inflation higher relatively quickly
  • Deliberations began with a bias to ease
  • Most of oil shock built into October forecasts
  • Since October, the magnitude of the shock of lower oil prices has clearly grown
  • Encouraged by economy's resilience, flexibility
  • Sees two track economy with resources shrinking, other sectors picking up
  • Canadian economy can still achieve above-potential growth
  • Asked why he's optimistic, Poloz cites strong US economy and stimulus in the pipeline
  • 2016 GDP forecast is 1.4% pending stimulus
  • Inflation expectations remain extremely well anchored

 Holding the rates will echo for some time now for the USD/CAD. Currently on the daily chart there is no buy zone at the current price. 1.44909 will have to hold before triggering more movement south for a bigger correction. For now the price will be subdued by the decision, but oil price will remain a key factor for where the CAD will be priced. Any news from OPEC or other oil related news may shift directions fast.