USD/CAD Loonie Flat Awaiting Fed Historic FOMC

The USD/CAD traded with little change on Tuesday a day before the U.S. Federal Reserve is to announced the first U.S. benchmark interest rate hike in a decade. After the disaster that followed the European Central Bank (ECB) statement at the beginning of the month investors are anxious if the Fed will delivered as promised. The divergence in monetary policy had up to that point driven the USD to gain versus majors, but the market reaction to the ECB announcement threw a wrench into the well established trend.

The Canadian dollar continues to be under pressure from falling oil prices. Oil markets bounced back today from 11 year lows but oversupply fears will dictate the price of energy in the short term. The USD/CAD moved 0.04 percent on Tuesday to trade near the session highs of 1.3740. The bounce in oil prices did not boost the loonie as it was mostly the result of profit taking by crude shorts after the rout at the start of the week. West Texas recovered 2.5 percent and is trading at $36.72 awaiting the Fed announcement.

Bank of Canada Will Not Match US Rate Hikes

Bank of Canada (BoC) Governor Stephen Poloz released the central bank”s financial review with a warning to young people that have accumulated high debt levels. Debt to income ratios increased in Canada, with the majority of increases coming from mortgages. Canada”s debt to income clocked 164.7 percent in the third quarter of the year according to Statistics Canada, but in some demographics it could be as high as 300 percent. The BoC is worried that this over leveraging will continue as the central bank continues to diverge from the Fed”s monetary policy as the U.S. if they start hiking rates tomorrow as widely expected.

The BoC Governor made it clear that the Canadian central bank would not match the pace of the U.S. Federal Reserve as the paths of the two economies will diverge. Poloz has mentioned that he is ready to cut into negative territory if the state of the economy justifies it. Governor Poloz had made clear that while the central bank does not have a price target for the Loonie, the hope is that exports are able to recover as the currency weakens. So far the currency has depreciated, but the benefits have yet to materialize but Poloz has maintained his outlook on the recovery of the Canadian economy despite softer data.

Tomorrow”s announcement by the Fed will shift the focus from the timing of the U.S. rate hike speculation to the pace of monetary tightening. There is expected to be at least 2 rate hikes in 2016 by the Fed, but the fact that it is an election year will limit the amount of market intervention available to the American central bank.

Wednesday, December 16
2:00 pm USD FOMC Economic Projections
2:00 pm USD FOMC Statement
2:00 pm USD Federal Funds Rate
2:30 pm USD FOMC Press Conference
Thursday, December 17
8:30 am USD Philly Fed Manufacturing Index
8:30 am USD Unemployment Claims
Friday, December 18
8:30 am CAD Core CPI m/m

*All times EST