I completely missed how the Bank of Canada (BoC) was deftly tempering its rate hike designs with a claim that the Canadian economy still needs more accommodation. For example, in April’s statement on monetary policy, the BoC said the following (emphasis mine):
“Some progress has been made on the key issues being watched closely by Governing Council, particularly the dynamics of inflation and wage growth. This progress reinforces Governing Council’s view that higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed to keep inflation on target. The Bank will also continue to monitor the economy’s sensitivity to interest rate movements and the evolution of economic capacity. In this context, Governing Council will remain cautious with respect to future policy adjustments, guided by incoming data.”
Even reading this after a May policy statement that dropped the accommodation conditional, I STILL think of the above quote as very dovish. The portion on rate hikes looks completely buried and overwhelmed. Here is what the BoC had to say about its policy stance in today’s statement:
“Overall, developments since April further reinforce Governing Council’s view that higher interest rates will be warranted to keep inflation near target. Governing Council will take a gradual approach to policy adjustments, guided by incoming data. In particular, the Bank will continue to assess the economy’s sensitivity to interest rate movements and the evolution of economic capacity.”
Given the surge in the Canadian dollar in response to this statement, I assume I share the same take-aways as the market with the BoC dropping its accommodation conditional: 1) “key issues” are now more or less resolved, 2) the BoC no longer needs to proceed with caution, 3) the BoC is getting itself ready to act by moving from “monitoring” to “assessing”.
While I think I have a good read on the Bank of Canada, I do not share similar feelings about the Canadian dollar. USD/CAD dropped swiftly and deeply, but the trading action happened in the middle of a wide trading range. USD/CAD is even still above its 50 and 200DMAs given the recent momentum in the U.S. dollar (UUP). So while I feel like I should go all in long the Canadian dollar, I prefer to fade rallies in USD/CAD up to the last high around 1.305. I will revisit this approach if/when USD/CAD finally breaks technical support.
Be careful out there!
Full disclosure: no positions