USD/CAD. Bank of Canada helped the Canadian dollar: price outpost of 1.3000 ahead

Traders of the USD/CAD pair negatively perceived the outcome of the July meeting of the Bank of Canada: as an initial reaction, the price rose by more than 50 points, updating the high of the day.


But the upward impulse did not receive its continuation. Firstly, due to the weakening US dollar, and secondly, due to the actual de-correlation of the intentions of the Canadian regulator and the US Federal Reserve. After all, by and large, the Bank of Canada's rhetoric was not "dovish", traders for the most part just expected what was nearly impossible from Stephen Poloz(in current conditions) - hints at a rate increase before the end of this year. The head of the Canadian central bank, naturally, did not live up to such "hawkish" expectations, so the loonie shot to the middle of the 31st figure. But on the whole, yesterday's "correspondence confrontation" between the Fed and the Bank of Canada ended in favor of the latter. After all, if members of the Canadian regulator decided to take a wait-and-see attitude, then their counterparts from the United States seem to have taken the opposite decision, taking the path of easing monetary policy.

However, the head of the Canadian central bank also voiced quite alarming signals, which indicate that at the end of this year, Stephen Poloz may follow the Fed. First of all, the head of the regulator was concerned about the external fundamental background. According to him, the consequences of the global trade war are becoming more tangible - in particular, the forecast for GDP growth in the global economy for the current year was reduced to three percent (from the previous value of 3.2%), for the next year - to 3.2% (from previous 3.3%). As the head of the central bank noted, the further escalation of trade conflicts will be the greatest risk for both the global and Canadian economy. In general, the theme of the tariff war was the main leitmotif of his speech, he repeatedly focused on this issue. Stephen Poloz was also concerned about the appreciation of the national currency. The Canadian currency has only increased against the US dollar as the loonie has grown by more than 500 points since the beginning of June. According to Poloz, such a significant strengthening of the loonie undermines competitiveness in world markets, adversely affecting the export sector.

Highlighting the negative aspects, the head of the Bank of Canada also noted the positive aspects. In particular, the regulator significantly increased the forecast of GDP growth in the second quarter to 2.3% (while the previous value was at the level of 1.3%). Such dynamics, according to Poloz, is explained by weather conditions and growth of the oil market. The third quarter promises to be less successful – the Canadian economy should grow by only 1.5% in this period . A significant increase in inflation in Canada was also due to temporary factors – at least, the members of the Canadian regulator are certain of this. In their opinion, inflation will decrease to 1.6% in the third quarter, but at the end of the year – in the 4th quarter – it should rise again to two percent.

In general, the rhetoric of Stephen Poloz were "optimistic-discreet" in nature. He noted the economic risks from trade conflicts, but did not dramatize the situation, announcing a possible reduction in the interest rate, even as a preventive measure. The head of the Bank of Canada stressed that at the moment the regulator's forecast is balanced and does not require any action. The appropriate decision will only be taken if the central bank faces "unrecorded risks."


All this suggests that the Bank of Canada will maintain a wait-and-see position for the foreseeable future (at least until October). This can not be said about the Fed, the head of which yesterday actually announced the rate cut at the July meeting. Jerome Powell similarly attended to the negative effects of the trade war between the United States and China, while noting the slowdown in inflationary growth, the decline in business investment and overall economic growth. Strong Nonfarm did not save the situation, because the dynamics of wage growth leaves much to be desired. Summarizing what was said, Powell made it clear that the Fed will reduce the interest rate by 25 basis points at the end of this month. But the next steps of the regulator will depend on the incoming data, above all - inflation.

The minutes of the last Fed meeting, published yesterday, only confirmed the dovish intentions of the regulator. Most members of the Federal Reserve forecast a decline in GDP growth and a decline in inflation, as well as an increase in unemployment. Thus, taking into account the fact that Jerome Powell actually repeated the theses of the June meeting, the question of a reduction in the interest rate of the Fed can be considered resolved.

The uncorrelated monetary policy will exert background pressure on the USD/CAD pair, which may increase if US inflation disappoints investors today. In this case, the loonie can approach the first downward target, that is, the strongest support level of 1.3000 (the bottom line of the Bollinger Bands indicator).

The material has been provided by InstaForex Company -