The Bank of Canada left rates alone, as expected, however it has removed its cautious tone in regard to the Canadian economy. In its statement, the BoC said that developments since the April meeting further reinforced the Governing Council’s view that higher interest rates will be warranted to keep inflation near target. The Governing Council will take a gradual approach to policy adjustments and continue to be data dependent. In particular, the Bank will continue to assess the economy’s sensitivity to interest rate movements and the evolution of economic capacity.
The Canadian dollar has rallied the best in two months, analyst fully believe that the BoC will hike rates in July at its next meeting, expectations have gone from a 50% chance to a 70% chance. Also, the USD fell against the euro as Italy’s biggest party would make a renewed attempt to form a coalition government and end months of political unrest.
USDCAD 1.2838, 1.2820, 1.2800 1.2848, 1.2860,1 .2879
USD-CAD has remained buoyant after posting a two-month high at 1.3046 yesterday. The sustained retreat in oil prices, which are presently above the six-week lows that were seen on Monday but still down on the day, have been weighing on the Loonie, which has also seen declines versus the yen and Swiss franc, among other currencies, although still gaining ground in the case against the underperforming euro. Crude prices in the WTI benchmark market are down some 9% from the major-trend peak that was seen last Tuesday — a magnitude of change that, if sustained, would impact on Canada’s terms of trade position. Uncertainty about the NAFTA re-negotiation and a shift in BoC tightening expectations, now favouring a more gradual tightening path, are also in market narratives. USD-CAD has support at 1.3006-08.
The euro has firmed up on a combo of perky data out of the Eurozone and amid a calming in Italian markets today. The common currency is presently showing an average 0.5% gain versus the dollar and yen. EUR-USD has logged a high so far of 1.1612, which is just over a big figure up on yesterday’s 10-month low at 1.1510. Yesterday’s peak at 1.1639 is still some way off, though, and any flagging before this level is reached would be taken as a sign by many market participants that the overall bear trend would be re-asserting itself. Italian markets have been mollified by news that the Five Star Movement and the League are in last-ditch talks to form a government that would satisfy President Mattarella. In data, German state inflation figures for May exceeded expectations, underpinning expectations for a rise in German HICP to 1.8% y/y in May from 1.4% in April. Spanish HICP also came in above forecasts, at 2.1% y/y, above the ECB’s upper limit for price stability. German retail sales also beat forecasts, and the German unemployment rate hit record low of 5.2%.