Home Loonie Leaps After GDP Beat

In a week that is dominated by central bank policy meetings, the Reserve Bank of Australia kicked off the parade last night by defying market expectations and choosing to leave their benchmark interest rate unchanged at 2.25%.   The decision to keep rates on hold is the first hawkish surprise from high-income central banks in 2015, considering the derivatives market was discounting close to a 60% chance a cut would occur, though the statement from the RBA indicates a bottom has not occurred for Australian interest rates, and the door is open for further easing at later meetings.   The reaction to the surprise move by the RBA has seen the aussie edge slightly higher against its crosses, though the short-covering rally from the bears has been feeble, with the dovish wording in the RBA’s rate statement leaving the aussie bulls weary of pushing too hard.   In addition, both Australia’s Q4 current account and building approvals in January came in better than expected overnight, though the antipodean currency has struggled to make any meaningful headway against the greenback, with AUDUSD stymied just north of the 0.78 handle as we go to print.

Elsewhere in Asia, the yen is strengthening against the big dollar, pushing USDJPY back from the 120 handle that has been strong resistance for the past few sessions.   Market participants are finding it hard to justify fresh short positions against the yen in this environment given the hearsay from sources close to the central bank that further yen weakness from these levels would hurt consumer sentiment.   This sentiment was further echoed today by Prime Minister Abe’s advisor Etsuro Honda, who warned against an overheating economy after employment wages jumped in Q4, going on to say that the USDJPY exchange rate is at the upper limit of the exchange rate’s comfort zone.   A robust US Non-Farm Payrolls print on Friday combined with the Fed dropping their “patient” language at the next FOMC meeting could challenge Honda’s notion the yen doesn’t have further to fall, but for now participants are waiting for additional catalysts before deciding on the yen’s next move.

As we head into the North American open, the economic data docket is heavily skewed towards releases north of the 49th parallel, with the most notable being Q4 GDP growth in Canada.   Economic growth over the final quarter in 2014 progressed at a faster clip than analysts expected, with the annualized reading coming in at 2.4%, stronger than the 2.0% that had been forecast.   The upside surprise to Q4 GDP gives the BoC further leeway to keep interest rates on hold at tomorrow’s meeting, and in our opinion will likely elect a policy stance similar to what was witnessed from the RBA last night.   While the economic data since the surprise January rate cut has not deteriorated to a level that would warrant an additional rate cut, Governor Poloz is likely to strike a cautious tone in regards to the outlook for the Canadian economy and keep the door open for further rate cuts should oil fail to stabilize around its current level.   Like Poloz telegraphed to market participants last week, the “insurance-like” rate cut has bought the central bank time to assess how the economy responds, and given the 2.4% annualized growth in GDP over Q4, the BoC likely won’t be in a rush to ease further unless oil takes another leg lower.   In the same vein, we still favour USDCAD a buy on dips as we are not confident oil has found a solid bottom and wouldn’t rule out another flush lower, along with the fact a robust US NFP print on Friday will heighten Fed rate hike expectations for June.   After today’s GDP announcement the loonie has popped higher against the greenback, with USDCAD tumbling into the mid-1.24s.

Further reading:

Canadian GDP rises 0.3% – USD/CAD falls

Why euro-zone positive surprises will NOT lift EUR/USD yet

Scott Smith

Scott Smith

Scott Smith is a Senior Corporate Foreign Exchange Trader with Cambridge Mercantile Group and has a diverse background in the foreign exchange industry, with previous experience in both credit and trading related functions. Scott holds a Bachelor of Commerce degree from the University of Victoria, has completed all three levels of the Chartered Financial Analyst designation, and is currently working towards the Derivative Market Specialist certification offered through the Canadian Securities Institute. Cambridge Mercantile Group.