USD/CAD – RBA Decision has the Loonie Bear Concerned

Capital markets are finally on the move albeit slowly. Record low bond yields, record high global equities indices, and strained forex ranges are beginning to provide more trading opportunities in these first few days of March. Let’s hope that this is the beginning of something a tad more promising, especially after last month’s -33% drop in market volatility.

Until now, central bank rate announcements had virtually handcuffed markets with their ‘transparent and forward approach’ to rate decisions. The change in tack early this month includes a shock rate cut from the People’s Bank of China last weekend, and the Reserve Bank of Australia’s (RBA) surprising standstill. Both will keep investors on their toes. The market is now unsure how the Bank of Canada (BoC) will react tomorrow. Governor Stephen Poloz threw a curve ball last week and upset the loonie bear that had been pricing in another consecutive rate cut.

RBA Flatfoots Aussie Bears

The probability for a second successive RBA policy easing tracked above +60% prior to last night’s decision. However, after last month’s unexpected cut, Governor Glenn Stevens once again surprised investors with a rate “hold” at +2.25%. The statement was mainly a reiteration of last month though notably more brief, since last month’s decision went to some length in explaining the cut.

It seems that the latest Australian data was not enough to spook Aussie policymakers. A key component of the statement was the reiteration that further easing may be appropriate, which is being seen as “continued easing bias,” likely to translate into an eventual easing in April or May. Markets will again focus on Aussie property prices for rate vindication as housing inflation has been cited as a potential deterrent for the RBA to take an extra accommodative stance.

The AUD’s initial reaction to the RBA’s stance managed to gain almost one cent (A$0.7830) on the greenback. The lack of follow through should certainly provide an opportunity for the AUD bear to improve their short-position averages. The unchanged decision has allowed the AUD to temporarily rally, at least until the dovish rhetoric filters throughout capital markets.

Will the RBA Influence the BoC?

An unchanged RBA is a blow for the loonie dove advocating a BoC rate cut tomorrow. The shock January 21 BoC rate cut preceded the RBA rate cut on February 3. Like Federal Reserve Chair Janet Yellen, Poloz did not provide a clear signal if the BoC will again lower interest rates during a speech he gave last week. The governor emphasized that last month’s -25bps cut (on the back of plummeting energy prices) buys time to see how the Canadian economy responds.

Up until then, the market majority had assumed it was a slam dunk that the BoC would be easing again on March 4; however, the possibility of a potential pause has thrown an extra spanner into the Canadian bear’s toolkit. Poloz reiterated that collapsing oil prices are a “net negative” and a setback for a Canadian economy trying to get back to full capacity and full employment.

Will Canada’s GDP Report Pressure the BoC?

A disappointing Canadian gross domestic product (GDP) headline this morning could put pressure on the markets to price in a rate cut at tomorrow’s BoC rate meeting. If there is a wide miss versus expectations, it has the potential of putting the CAD under immediate pressure outright and on the crosses. Market consensus is looking for +2% headline print, well below the forecast headline releases by the governor in January. The details are expected to show that most of the strength still comes from household consumption, while growth in residential investment likely dipped into negative territory, and net exports are expected to have weighed on growth as a result of lower oil prices. Inventories are a big uncertainty and leave the overall forecast with “modest downside risk.”

Canada, a Group of Seven member, is suffering more than most from the sharp fall in oil prices. The -60% fall in crude prices in eight months is having a massive impact on the country’s economic growth. Already this week, investors received horrid Canadian headlines. Last month’s Canadian manufacturing purchasing managers’ index came in at a record low 48.7 on Monday. The market’s apathy toward the USD has been able to keep the CAD in check and range bound for the time being. However, tomorrow’s rate announcement could be the catalyst that is needed to push the loonie bear to new record lows outright. The market remains a better buyer of USD on any pullbacks until proven wrong.

Japanese Jawboning Aids Yen

The AUD was not alone; USD/JPY was also among the more active dollar majors in the overnight session. The mighty dollar happened to fall from its lofty ¥120 handle to below ¥119.60 as Prime Minister Shinzo Abe’s economic adviser Etsuro Honda warned against potential overheating of the economy as a result of the Bank of Japan’s (BoJ) overly aggressive policy.

Honda said that Japanese policymakers should not react to lower oil prices weighing on inflation. Also pushing the yen higher were corporate surveys that saw about +90% of respondents call for BoJ Governor Haruhiko Kuroda to change the timeframe for achieving +2% inflation, and more than +50% for the BoJ to make the deadline vague and push it back.

Even economic releases suggest that the BoJ should be standing aside for the time being. Japan labor cash earnings — a closely watched inflation indicator — saw yet another negative year-over-year print on inflation-adjusted basis. The jawboning and disappointing economic headlines has managed to weigh on Japanese equity prices which continue to have a strong correlation to USD moves.

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