Following January’s Bank of Canada’s (BoC) meeting, which decided to maintain its key rate at 1.75% for the second consecutive time, the loonie is holding up against the greenback. Under current settings, we expect the Canadian economy to stay robust and the BoC possibly to hike its rate by December 2019. USD/CAD’s drop from yesterday might be over, as optimism for resolution of the Sino-American trade dispute builds. However, risk of a US government shutdown by Saturday looms. Currently trading at 1.3225, USD/CAD is heading along 1.3255 short-term.
Canada’s GDP growth is now projected at 1.70% from a prior 2.10%. Inflation remains consistent, with December headline and core consumer prices at 2% and 2.30% (prior figures: 1.70%). The labour outlook remains highly constructive. Hourly earnings have taken off since a November 2018 downtrend, up 1.80% in January while the economy built 67,000 jobs in the same period. The recent bounce in oil prices from December is good for Canada’s trade balance. It benefits from OPEC’s price hike and Saudi Arabia’s output cut, but also from USA’s oil import sanction against Venezuela, as US refiners are willing to substitute it with Canadian heavy crude.
Short-term Kiwi boost
The New Zealand dollar surged more than 1.8% on Wednesday morning amid an unexpected hawkish – or less dovish – announcement from the Reserve Bank of New Zealand (RBNZ). NZD/USD hit $0.6850 before stabilising around $0.6825. As broadly expected, RBNZ left the Official Cash Rate unchanged at a record low 1.75%. Governor Orr surprised markets by declaring “we expect to keep the OCR at this level through 2019 and 2020.” Nevertheless, he let the door open for a cut, saying “the direction of our next move could be up or down.” In the short-term, we expect NZD/USD to grind lower as investors discount a possible rate hike by the RBNZ and focus on the eventuality of a rate cut. A return towards $0.6770 seems most likely.
Investors chose to see the glass half-full rather than half-empty. Orr’s is far from a hawkish comment: rather it reveals that the central bank sees dark clouds on the horizon. Just like its neighbour Australia, New Zealand’s economy is globalised and heavily dependent on international trade. Its dependence on external demand could be difficult, especially if the Sino-American trade war worsens.
