The Canadian dollar paired with the US currency yesterday took a negative view of the results of the April meeting of the Bank of Canada, returning to the area of the 26th figure. The regulator left the rate at the same level, voicing very optimistic prospects. But the market was expecting a more "hawkish" attitude, and the bullish sentiment of USD/CAD was noticeably stronger yesterday. And yet, despite this situation, the southern trend has not lost its relevance. A common fundamental background contributes to the strengthening of the Canadian dollar, and the position of the Bank of Canada does not look so "dovish" in more detailed review.
On the eve of yesterday's meeting of the Canadian regulator, traders' sentiment were lifted by a number of positive news. First of all, this is the resumed growth of the oil market. The cost of a barrel of Brent oil was fixed above $70 - for the first time since 2014. The second optimistic factor was the progress in the negotiation process on the fate of NAFTA. Positive things about the Canadian labor market have added value.
These fundamental factors made it possible to rely on tougher statement from the officials of the Canadian regulator. But the central bank has not lived up to such expectations. Stephen Poloz said that the further increase in rates will be justified "in time", but for the time being it is necessary to be cautious in this matter. He also noted the weak growth of the country's GDP in the first quarter and certain problems in the export sector. By and large, this is an exhaustive list of "dovish" arguments, which served as the reason for yesterday's growth of the USD/CAD.
Figuratively speaking, the market decided that "the glass is half empty", while ignoring the positive comments of the head of the Bank of Canada. First, Poloz stressed that interest rates in any case will need to be increased against the backdrop of growth in wages and inflation. The consumer price index actually jumped to 2.2% YoY (the previous figure was 1.7%), mainly due to a significant rise in price of gasoline (by 12%). It should be noted that this is the sharpest rate of inflation for the last three years. The level of the average hourly wage is also growing. A positive trend has been recorded since October last year, reaching 24.86 CAD/Hour in February.
As we see, the growth of oil prices indirectly affects the inflation indicators of Canada, therefore the current trend in the oil market allows making optimistic forecasts regarding the further growth of the consumer price index.
The cost of a barrel of Brent oil today exceeded $74, again renewing the long record. WTI crude oil also jumped to $69, even in March barely overcame the 60th level. Many factors contribute to the growth of oil quotations. First of all, this is geopolitical tensions. And although after military strikes against Syria in the world they started talking about the de-escalation of the conflict, this is not the case. According to the American media, President Donald Trump plans in the near future to replace his troops in Syria with the forces of the Arab countries. So far, these are just speculations, but they show that the Syrian problem is far from its resolution- and the White House will somehow pressure on Damascus. Syria in itself is not a significant exporter of oil, but further escalation in this region threatens logistics, and as a result, can cause a reduction in the volume of production and supplies in general from the Middle East.
Another factor is the uneasy relations between the US and Iran. If sanctions against Iran are reimposed, the total volume of world supplies will be reduced to about 500 thousand barrels per day. According to experts, this will trigger an increase in oil quotations by about 5-8 dollars. At the moment, such a scenario is unlikely, but the warlike tweets of Trump against the background of general geopolitical tensions are pushing commodity prices up.
We should not forget about the difficult situation in Venezuela. In March, the level of production in this country fell by 100 thousand barrels per day on the background of the strongest economic crisis. The default was fixed already on 15 sovereign bonds, and next year Venezuela will need to pay off bonds worth more than nine billion dollars. It should be noted that Venezuela is among the ten countries in the world that produce the most amount of oil. Therefore, such economic cataclysms in this country inevitably affect the oil market.
However, the Canadian dollar is supported not only by the oil market. The fact is that over the next five to six weeks, most likely, an updated deal on the North American Free Trade Agreement between the United States, Canada and Mexico will be concluded. Last weekend in Peru, the summit of Latin American countries was held, where the parties noted the significant progress in the negotiations. In particular, US Vice President Mike Pence said that the remaining differences "will be resolved within a few weeks."
Thus, if the basic picture is not fundamentally changed in the next few months, the Bank of Canada may again return to the issue of raising rates. According to analysts, this will happen either at the July or the September meeting.
In this context, the dynamics of the Canadian consumer price index should be taken into account. We will learn the March values of this indicator tomorrow. If the release comes at least at the forecast level (up to 2.4% in annual terms), the USD/CAD pair will resume the downward movement, heading for the first target of the southern trend - 1.2470 (the bottom line of the Bollinger Bands indicator on D1). From the point of view of technology, the situation has not changed: the main indicators are still signaling bearish sentiment. The fundamental background also contributes to the implementation of this scenario.
