USD/CAD – Canadian Dollar Rebounds from post – FOMC Weakness

The Canadian dollar rode a roller-coaster yesterday and managed to squeak out some gains overnight. U.S. dollar sentiment drove all the moves. The loonie was just a passenger.

The Canadian dollar rallied yesterday morning, in part because traders were expecting a somewhat benign statement from the U.S. Federal Open Market Committee. That didn’t happen. The FOMC raised interest rates by 0.25%, setting the new target range for Federal Funds at 1.75% to 2.00%. That move was expected and fully reflected in current exchange rates.

What wasn’t expected was the hawkish tone to the policy statement. The FOMC statement was upbeat. The committee tweaked the language suggesting that U.S. economic growth is strong, rather than moderate. They deleted the reference about leaving policy rates being “below levels expected to prevail in the longer term.” Instead, it suggests that prices will be going higher, albeit, gradually.

The committee also raised its interest rate projections for 2018. Instead of three rate increases in 2018, the FOMC expects four rate hikes.

The Canadian dollar plunged on the news. USD/CAD rose from $1.2957 to $1.3049 in a heartbeat. The move didn’t last. Prices quickly reversed and dropped back to the day’s low

The overnight action was far more subdued. The Canadian dollar tracked U.S. dollar moves in a narrower range. USD/CAD trade in a $1.2950-$1.2990 range.

The focus shifted to this morning’s European Central Bank policy meeting and press conference with China economic data providing a brief distraction. China reported softer than expected Retail Sales and Industrial production growth. Generally, weak China implies reduced demand for imports which has a ripple effect on exporters such as Canada. This data was ignored.

Traders aggressively adjusted positions ahead of the ECB meeting. Many analysts are predicting a “hawkish ship” to the ECB statement which will be confirmed by an announcement of an end date to the quantitative easing program. ECB President Mario Draghi hasn’t shown any indication that he is leaning that way. He previously said that substantial stimulus is still required to ensure the Eurozone recovery. Nevertheless, EUR/USD rallied, and the broad U.S. dollar weakness lifted the Canadian dollar.

The Canadian dollar remains vulnerable to renewed selling. The Bank of Canada decided against raising interest rates in March due to uncertainties around trade, particularly the North American Free Trade Agreement. Those uncertainties have re-surfaced which could mean the anticipated BoC rate hike in July, gets pushed out to a later date. Time will tell.

This article provided by NewsEdge.