Bank of Canada doubles down on dovishness

Forex 5 minutes to read

Michael O’Neill

FX Trader, Loonieviews.net

Summary:  Canada's central bank has removed all doubt that it will be following a dovish path in the wake of last week's major GDP miss, with officials citing trade tensions and the gathering global slowdown as the backdrop to their caution.


MIf traders weren’t convinced that the Bank of Canada’s monetary policy outlook was dovish, they will be after today. The BoC left interest rates unchanged at 1.75% as expected but the rest of the statement was a surprise.

It was very dovish. The Bank is concerned about a more pronounced slowdown in the global economy, blaming multiple trade tensions and uncertainty for weighing on confidence and economic activity. More importantly, it was spooked by last Friday’s weaker than expected Q4 GDP report, saying “the slowdown in the fourth quarter was sharper and more broadly based. Consumer spending and the housing market were soft, despite strong growth in employment and labour income. Both exports and business investment also fell short of expectations. After growing at a pace of 1.8% in 2018, it now appears that the economy will be weaker in the first half of 2019 than the Bank projected in January.”

USDCAD smashed through pivotal resistance at 1.3380 and is on track for a test of 1.3550 in the coming days. 

The US dollar index (USDX) is fast approaching a “make-or-break” level for US dollar bulls at 97.60 (61.8% Fibonacci retracement of January 2017- February 2018 range) on a daily chart. A break would target the 76.4% level at 98.82. For EURUSD, comparing the same periods, it suggests that a break below 1.1212 would open the door to further losses to 1.0898. Tomorrow’s European Central Bank (ECB) meeting could be the catalyst, especially if ECB employment and GDP results are worse than expected.

Bloomberg, citing “sources”, claims that the ECB will downgrade its growth and inflation outlooks enough to justify a new round of Targeted Long Term Refinancing Operations. The tone of ECB president Mario Draghi's press conference will be critical, especially if he is more dovish than usual.

The US dollar is little changed in a quiet New York session because of a lack of progress updates from the China/US trade talks and little top-tier economic data. The US ADP employment report (actual 183,000 versus a forecasted 189,000) was close enough to projections to be ignored. The widening of the US trade deficit (actual -$59.8bn versus a forecasted $57.9bn was attributed to “tariff-dodging” flows.

Wall Street opened with a snore. The major indices are either side of unchanged. Traders are awaiting fresh incentives to trade and this morning's data didn’t qualify. President Trump has been quiet, and there hasn’t been any news on the trade talks front. 
USDX
US dollar index (daily, source: Saxo Bank)

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