With the end of the month approaching, financial markets were fixated on the first official speech from Janet Yellen after the rate decision from the FOMC earlier this month. Market participants were interested to see if Yellen kept the same tone as communique issued after the decision, one that was decidedly dovish, advising the committee would proceed with caution given the uncertain global economic conditions, consequently warranting a flatter interest rate trajectory than previously forecast. In recent days the greenback had been able to recover some of its losses suffered post-FOMC decision, as members of the board on the speaking circuit had taken a slightly more hawkish tone than referenced by the rate statement, suggesting that domestic economic indicators increased the risks surrounding waiting too long to continue with the interest rate normalization process. However, global equities breathed a sigh of relief, as today’s statements from Janet Yellen quashed any concerns the March statement had been misinterpreted, reiterating her guarded sentiment towards international developments and the need to remain cautious with the interest rate normalization process in the United States.
Specifically, Yellen cited her worry the positive developments in inflation expectations may not be durable given the international landscape, and that while they do seem anchored for the time being, a deterioration in Chinese economic growth or oil prices could erode the constructive progress witnessed thus far. The comments with reference to the Federal Reserve being provide accommodation even if rates returned to the zero bound was quite the departure from what Yellen’s colleagues have been peddling on the speaking circuit, and as such, assets correlated with positive risk-appetite took flight as USD bulls were pummeled. The DXY index has found initial support at levels slightly better than the wash-out after the FOMC rate decision earlier this month, though the probability of a rate hike in June has slipped from 34.6% to 28.4%. The loonie decoupled from oil prices after Yellen’s speech, choosing to react to the sliding greenback as opposed to the weakness in crude price action, hammering USDCAD lower by almost 1% on the day.
Speaking specifically to the price action in the USDCAD, the loonie strength is interesting considering the main drivers of Yellen’s cautious nature arise from uncertainty over the path of oil prices and the knock-on effects for inflation expectations. To wit, if low oil prices derail inflation expectations then the Fed will remain on hold, but at the same time, low oil prices are not something the Canadian economy will welcome with open arms. Therefore, even though interest rate spreads between US and CDN debt have narrowed after the March Fed statement, the divergence from spot price action still remains wide considering historical correlations. For loonie traders, today’s data on crude oil inventories from the EIA will likely draw attention given the recent softness in WTI, though last night the API data showed less of a build than had been expected, so if confirmed by the EIA data later today, the front month crude contract may be able to gain some traction after almost of week of sustained weakness.
Also on the docket today for the North American session is employment data for the United States as reported by ADP. The employment situation in the United States continues to improve and absorb excess slack, though the headline numbers for January and February as reported by the BLS have been somewhat misleading. January’s headline print was weaker than anticipated though the ancillary indicators such as workweek hours and wages were quite strong – February’s employment situation was almost the exact opposite. Taken in conjunction, the two reports suggest the labour market continues to absorb slack and contribute to strong consumer spending figures, though the Fed has made it clear the domestic labour situation is not the only indicator it is watching in respect to interest rate policy. Expectations for today’s ADP print are to see a slight easing from February number, and could potentially steal some of the thunder from the non-farm BLS number on Friday, but we would caution that any headline shock from upcoming employment reports may be depressed in the short-term given the Fed’s heightened vigilance towards international developments and volatility in equity markets as opposed to domestic developments.