The Canadian dollar was one of the more exciting G10 currencies against the dollar last week with only the Norwegian krone and British pound proving more volatile.
Fresh policy guidance from the Bank of Canada provided the impetus for much of the currency pair’s movement as the policy statement removed the word “appropriate” when describing current rates.
The Monetary Policy Report and Governor Poloz’s press conference highlighted that risks to the Canadian economy had rotated from deteriorating external conditions, to more pronouced domestic fragilities in the New Year.
The Q4 2019 growth projection was also downgraded…
Despite inflation continuing to track around the bank’s 2% target, heightened public sector infrastructure spending and business investment suggests the output gap may widen and pose a deflationary risk.
Even though Governor Poloz avoided discussions of a pre-emptive “insurance” rate cut now the external headwinds have abated with the phase one US-China trade deal, traders increased their bets to above 50% for a rate cut at April’s meeting.
Last Friday’s retail sales data for November did little to dispel fears. Much of the headline figure’s outperformance came from the auto sector, with the sale of motor vehicles and parts being the largest contributor to the 0.9% MoM print.
Once discounting the strong rebound in the auto sector, retail sales printed at a more tepid rate of 0.2% MoM. The loonie reaction was mild despite this being the first piece of data released since the BoC announcement, partly due to the mixed nature of the data but also due to it being released with a lag.
This week’s data may be tarred with the same brush. Friday’s GDP report provides data for November and gives little guidance on economic activity thus far in 2020.
In that respect, market participants will have to wait until February to receive economic signals from the data and BoC Deputy Wilkins before repricing their expectations in both fixed income and currency markets.
Author: Simon Harvey, FX Market Analyst at Monex Canada.