The Canadian Dollar Pushes Past A Dovish Bank Of Canada

The Bank of Canada released its latest pronouncement on monetary policy on the heels of a rapid rally for the Canadian dollar (FXC). USD/CAD was down 5 straight days going into the release of the January, 2019 Monetary Policy Report. Four of five of those days delivered substantial declines.

USD/CAD broke down below 50DMA support to start the week and looks ready to challenge 200DMA support.

USD/CAD broke down below 50DMA support to start the week and looks ready to challenge 200DMA support.
Source: TradingView

The Bank provided a truncated summary of the Monetary Policy Report in the following one-minute silent video.

The Bank of Canada left its interest rates as-is given a thick soup of economic headwinds and tailwinds. Lower oil prices dropped the forecast of GDP growth for 2019 from 2.1% to 1.7%. Trade tensions between the U.S. and China and increased tariffs also threaten to lower projections for global growth and trade. Lower than expected consumption spending and housing investment along with subpar wage growth are also weighing on the economic outlook. However, Canada should benefit from a strong group of counteracting tailwinds:

These developments are occurring in the context of a Canadian economy that has been performing well overall. Growth has been running close to potential, employment growth has been strong and unemployment is at a 40-year low. Looking ahead, exports and non-energy investment are projected to grow solidly, supported by foreign demand, the CUSMA, the lower Canadian dollar, and federal tax measures targeted at investment.

Governor Stephen Poloz summed up the situation in his extensive opening statement as follows:

A lot has happened since our last MPR in October. For one thing, the US-led trade war is beginning to have negative economic consequences. Global financial markets have reacted—bond yields have fallen, yield curves have flattened even more and stock markets have repriced significantly. Here in Canada, lower oil prices have reached the point where they will have material consequences for our macroeconomic outlook. And, our housing sector is taking longer than expected to stabilize…

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Disclosure: net short the U.S. dollar index

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