Wednesday, July 15, 2020

Today’s focus will be on new BoC Governor Tiff Macklem's language in his first post-meeting conference

  • Dollar
  • CAD
  • Bank of Canada


Analysts’ Pick: Today’s focus will be on new BoC Governor Tiff Macklem's language in his first post-meeting conference

  • BoC looks likely keep monetary policy on hold today, but focus will be on new Governor Tiff Macklem during his first post-meeting press conference.
  • Cautious optimism may be the theme for the week, as the Canadian economy starts to show some signs of recovery from earlier lockdowns.
  • We may see the central bank increase its pace of asset purchases, but it may only have a temporary impact on the Canadian dollar since it may have already been priced in given that the BoC’s average rate of asset purchases have already been increasing in past months.
  • June’s retail sales in the US should be close to economists’ estimates with some skew towards the downside as uncertainty among consumer in June may have spiked following the resurgence of Covid-19 cases in multiple states, and as increased employment benefits come to an end in July.
  • USD/CAD may as a result fall towards its 200-day moving average and test the previous week’s low, although it looks unlikely that it will manage to break that level.

The Bank of Canada's (BoC) policy meeting today will likely result in no additional easing from policymakers. But focus will likely be on new BoC Governor Tiff Macklem and his language following his first post-monetary policy meeting press conference. Increased government spending may warrant another step up in the pace of weekly government bond purchases, but the already increasing average rate of purchases suggests that it may have a reduced impact on financial markets. Similarly, there is little reason to cut rates given that the economy has shown signs of recovery. A rate hike at this point is highly unlikely as well, given the depth of economic damage and high levels of uncertainty.

Canada’s economic indicators signals that the Canadian economy has shifted into a recovery phase


With Macklem now at the helm of the BoC, it could mean a different style in communication, given that he has served under both Stephen Poloz and Mark Carney. Earlier comments from Macklem acknowledging that the central bank’s asset purchase programs were quantitative easing programs as opposed to Poloz's statements that leaned towards regarding the programs catering to market functions cements this as well. As a result, we expect him to adopt an approach similar to other central banks, in which he will highlight the high levels of uncertainty regarding the current economic environment while signalling the dependence of decisions based on its inflation target and economic conditions for future tightening of monetary policy. This should provide greater clarity for financial market participants in the sense that monetary policy tools as compared to the current wordings used by the bank to buy government bonds until the recovery is “well underway”.

Overnight Index Swaps signals that there is little expectation for adjustments to the BoC’s key rate for the rest of the year


This month's monetary policy report may also be slightly more optimistic than that of April, as the economy shifts into a recovery phase. Only cautious optimism is likely to be the case however, since Macklem has already placed emphasis in the high levels of uncertainty surrounding the economy. As a result, it looks likely that the loonie may have some upside pressure on the announcement of the decision. Strength in the loonie will likely only be slight however, since it is more likely that the central bank will only be cautiously optimistic as compared to its previous meeting considering the amount of downside risks the global economy is facing. An explicit indication of an increase of pace in asset purchases may put some downward pressure on the Canadian dollar, although the optimism is likely to outweigh its impact, since prices may have already factored an increase in pace given that the average pace has already been increasing over past weeks.

The BoC has on average been increasing its pace of government bond purchases over the past few months


On Thursday, US retail sales data will likely continue to show improvements in June, but at a slower rate compared to May. We expect June's actual figures for both headline retail sales and core retail sales (ex. auto and gas) to be close to economists' estimates, but with a slight downside skew. For headline sales, June continued to see improvements in auto sales as more car dealers reopened and manufacturers returned to operating closer towards normal capacity. With gas prices recovering by 10.92%, it signals that there will be strength in gas station sales as well, as an increasing number of people in the US likely started to return to the roads following the easing of lockdown restrictions. The high levels of uncertainty however, may put some pressure on core retail sales since June saw some hints of accelerating Covid-19 cases in multiple states. The impact may be understated for June, since the resurgence of the novel coronavirus was more towards the end of the month and start of July.

Increased gasoline prices and auto sales suggests that Americans continued to spend more time on the road in June, while a spike in consumer spending in May suggests that spending is likely to improve in June but at a slower rate


Consequently, the outlook for the Dollar Cad looks to be tilted towards the downside over these couple of days. The loonie looks more likely to strengthen slightly on the BoC's upcoming monetary policy report today, although there may be some room for a slight initial drop if the central bank explicitly says that it will increase its pace of asset purchases. USD/CAD may thus fall towards 1.3557's level, with some possible initial limited upside pressure to 1.3629. A potential improvement in US retail sales may also help push the dollar lower as risk falls and more if it under performs market expectations since the recent emergence of strength in the euro suggests that it may trigger a greater incentive to diversify beyond the US. USD/CAD may be able to reach 1.3493's level as a result.

Technical Analysis:


The Dollar Cad continues to trade within the 0% to 23.6% Fibonacci retracement range with bulls having some slight advantage against bears with a strong support at the 200-day moving average. MACD suggests that there may be downtrend cycle forming, with the RSI indicator showing that the currency pair has much room to drop before reaching oversold levels. Hence, with fundamentals skewing the greenback weaker and Canadian dollar stronger, we may see the currency pair retest the recent low at 1.3493’s level this week again. It looks unlikely that bears will manage to break that level however, as recent attempts have remained futile as well. Upside risks to the Dollar Cad’s weakening may materialise in the form of an increased pace of asset purchases which would essentially cause the Canadian dollar to weaken and put some upward pressure on USD/CAD.

Support: 1.3557 / 1.3493 / 1.3375

Resistance:  1.3629 / 1.3684 / 1.3800

USD/CAD Chart (H4)