The market had thought that the former CEO of Export Development Canada would take a dovish stance at the Bank, he did no such thing. In contrast to his predecessor Mark Carney who is mixing things up at the Bank of England, Poloz delivered roughly the same message as Carney.
The key takeaway from the July BOC meeting:
There is significant slack in the Canadian economy and Q2 GDOP could be disrupted by flooding in Alberta.
Q3 GDP expected to bounce back.
There is considerable policy stimulus in place already.
A gradual normalization of policy interest rates can be expected.
The market had expected Poloz to drop former governor Mark Carney's tightening bias; however, he did no such thing. While he may have watered down the semantics of the BOC statement, essentially under Poloz a rate hike is still more likely than a rate cut.
This had an immediate impact on the spread between US and Canadian bond yields. It narrowed as Canadian yields rose and US yields fell during the Bernanke testimony, which could hinder further USDCAD gains as this pair tends to follow the spread closely as you can see below.
From a technical perspective a few things stand out:
USDCAD continues to run into resistance at 1.0440 – the top of the recent range.
Without a significant break above here the bias is lower.
Key support comes in at 1.0345 – the 50-day moving average, this could attract some buying interest.
Overall, we could be in range-trading territory between 1.0340 – 1.0450 for the next few weeks until we get the July US payrolls data in August, which should give us a good steer on the timing of Fed tapering.
Tip: although we think that the USD will resume its gains as the Fed still looks poised to taper in September, for now the greenback could be range-bound as Bernanke's testimony leaves the market without a clear direction. Thus, we would not be surprised to see USDCAD drift lower from here, before being picked up on the dips.
IMOH, Clement I.
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