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Loonie Hits 2 Week High Following Relatively Dovish Fed

Published September 22, 2016
  • USDCAD is testing support just above the 1.3000 handle at time of writing this morning as the Loonie benefits from what turned out to be a relatively dovish Fed yesterday
  • Risk assets as a whole have seen the rising tide and got on board, as Asian and European equities rose overnight with US and Canadian markets set to follow suit
  • Oil is also higher on the day which contributes to the good times for the Loonie – WTI front month prices are up 1% to $45.83 a barrel
  • The oil rally has now extended 8% over the course of three days on the back of a withdrawal of crude supplies from US inventories, positive overtones of cooperation from OPEC and now a dovish Fed
  • Janet Yellen and her colleagues did their best to deliver a 'hawkish hold' yesterday but the market isn't buying it
  • Despite the largest contingent of dissenters since September 2011, the Fed has proven incapable of convincing the market that they will be able to raise rates any time soon
  • Fed Presidents, George, Mester and Rosengren, each dissented in favor of a hike and, while notable for the degree of discord among the ten voting members, it seems to have had a limited impact
  • The ultimate reason for the market calling the Fed's bluff once again is Janet Yellen stating that, despite unemployment of 4.9%, labour market strength had "more room to run"
  • This is likely a reference to weak earnings growth which in turn has contributed to stubbornly low inflation and aggregate demand, all of which contribute to the thesis of "lower for longer, get used to it"
  • As a result, US yields have fallen along with USD, with USDCAD 1.75% lower prior to the meeting and looking set for another run to the low end of its recent trading range circa 1.2825-1.2900
  • Risks remain, however, for USDCAD traders, as Canada reports CPI and Retail Sales data Friday morning at 830am ET
  • A poor showing could easily stop this Loonie rally in its tracks especially given the recent dovish tone expressed by BoC Governor Stephen Poloz

Charts: (1) USDCAD failed near range highs of 1.3255, set for a pull back. (2) Fed Rate Hike Probability. (3) Economic Calendar.