Headlines from Bank of Canada Sr. Deputy Governor Caroline Wilkins are boosting USD/CAD:
- Labor market shows there is slack in the economy
- Monetary policy will need to support adjustments
- Expects stronger US economy
- BOC mon pol response to keep recov 'on track' despite
setback from oil price drop - if Canada potential output growth 'turns out to be lower than we think, we have
the tools to bring inflation back to target.' - Rate cut will support needed sectoral adjustments
The OIS market is pricing in a 57% chance of a rate cut on March 4. She doesn't particularly sound like another cut is coming but it will be worth a read of the full speech.
USD/CAD is acting as if she promised a cut but that might be misplaced (up 35 pips). Bloomberg's headlines sound more dovish than others but it's quoting from the press release. Then again, the press release is from the BOC so maybe that's a signal in itself.
Update: The press release says "monetary policy will support the needed adjustments," which sounds like a promise.
The Canadian economy still has room to grow, and the sharp drop in oil prices is a setback, Bank of Canada Senior Deputy Governor Carolyn Wilkins said in Ottawa today, adding that monetary policy will support the needed adjustments.
However, she doesn't actually say that. Overall, she shows some serious concerns about the slack in the labor market but there is nothing clear on the outlook for monetary policy so it comes down to whether her actual words matter or the press release and that's a tough call.
Of course, there is a risk that additional capacity won't be added fast enough to keep the output gap from temporarily going positive. An economy pushing up against the limits of its capacity may be just what is required to signal the need for additional investments and to draw workers back into the labour force. There is uncertainty about how much potential can be rebuilt, and we need to take this into account in our risk-management approach to monetary policy.
Our inflation-targeting framework gives us flexibility on the timing to achieve the inflation target while also taking into account other important dimensions of the economy - such as financial stability and the economy's potential. Stifling the rebuilding phase of the recovery could mean lost economic opportunity. That being said, if potential output growth turns out to be lower than we think, we have the tools to bring inflation back to target.
USD/CAD rose above 1.2570 from 1.2525 on the headlines.
USDCAD 10 minutes
Technically, the break higher takes out the wedge that I highlighted yesterday.
