Bank of Canada's Statement
The Bank of Canada kept its overnight rate at 4.5%, in line with expectations. It was the first major central bank to pause its hiking cycle. In its rate statement the BoC said that the "Governing Council continues to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further if needed to return inflation to the 2% target."
Canadian CPI inflation moderated in February to 5.2%, with the preferred measure of core inflation below 5%. "The Bank expects CPI inflation to fall quickly to around 3% in the middle of this year and then decline more gradually to the 2% target by the end of 2024."
The prospects of inflation still need to be monitored as Canada's "demand is still exceeding supply, and the labour market remains tight." However, "as more households renew their mortgages at higher rates and restrictive monetary policy works its way through the economy more broadly, consumption is expected to moderate this year." Moreover, softening foreign demand will likely curb exports and business investment.
Nevertheless, "getting inflation the rest of the way back to 2% could prove to be more difficult because inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behaviour has yet to normalise."
The top chart shows the spread between the US and Canadian 2-year notes. These generally serve as a good proxy for respective monetary policy. The spread is trading in the bearish channel between the lower blue and red bands. This connotes that the Fed is relatively more dovish than the Bank of Canada. This is even though the market expects another 25bps from the Fed on 3rd May. The fixed income market is likely looking forward here with the Fed minutes pointing to a recession later in the year due to the US banking crisis.
The middle chart shows that the USDCAD is also trading in its bearish channel between the lower blue and red bands. The longer it maintains in this area, the greater the potential for lower prices ahead.
It is not surprising that the forex pair is also in in its bearish area. The bottom chart shows the correlation coefficient between the 2-year spread and the USDCAD. It shows a robust correlation of 76%. I.e., there is a strong positive relationship between the two series - relative monetary policies are affecting the USDCAD.
BoC Rate Statement
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.