Even if most of the fundamentals and economic news have been overshadowed by Eastern European tensions, we would like to make a quick preview ahead of the Bank of Canada meeting tomorrow. As we reported in our last update on Canada (here) in mid-January this year, the Canadian dollar has remained under pressure against the greenback in the middle of this QE-Taper scenario. A series of poor fundamentals (widening current account deficit, declining housing market …) combined with low inflation expectations at the last meeting back in January (BoC Governor Stephen Poloz announced he was concerned about ‘low inflation’) and bearish CAD-investors helped us reached our medium term target at 1.1200 (USDCAD) on January 31st.
However, a few ‘surprises’ in the month of February helped the Loonie to recover and for the past couple of weeks, USDCAD has been trading around the 1.1100 level within a tight range of 140 pips (see chart below, 1.1040 – 1.1180). We saw that the economy expanded more that expected in the final three months of last year (2.9% QoQ vs cons. 2.5%) and the inflation rate jumped unexpectedly to 1.5% in January, up from 1.2% the previous month and closer to the BoC 2-percent target.
Therefore, both of the macroeconomic data reduced the likelihood of an interest rate cut for tomorrow’s meeting. We still expect a dovish/neutral tone from Governor Poloz, which could potentially push the Canadian dollar higher against the greenback in the short term. As we said, the next support on the downside stands at 1.1040; a break could then spur a move back towards 1.0910 (low reached on Feb 17th). In that case, I would then see this support as a new buying opportunity.