Bank of Canada to keep policy unchanged as USD/CAD looks ready to retrace

Everything seems to be range trading and even with a bit of data to play with today, there’s been effectively nothing to move market prices in any meaningful sense. Asian stock indices have traded mixed and the moves have been modest.

Forex markets are sending no clear signals and have barely moved at all. Oil - US Crude prices have extended their overnight climb and our prices are suggesting basically a flat open for European and US stocks tonight.

A very crude explanation for the lack of vigour in markets right now is that we are missing catalysts, and are, at the moment, stuck in a sort of volatility free middle zone.

Stocks offer yield, but valuations are rich

The Fed is still accommodative, and its likely to stay that way, but it’s unlikely to ease things any further any time soon. All in all, it means momentum can’t be generated, so until we get a good old nudge, we risk being stuck in the proverbial no man’s land.

At a shorter time scale, and as traders search for catalysts, a degree of the listless price action could be pinned on the positioning for tomorrow’s US CPI release, along with the meetings of the European Central Bank and Bank of Canada. If it weren’t obvious already, the markets’ concern with inflation has gone out the window, with yields dropping and bond market volatility decreasing markedly.

The US Ten-Year yields has pushed to as low as 1.51% today

While the Australian ten-year yield has traded at 1.57% and its lowest point since late-February. Clearly, the risks of Fed – and therefore Reserve Bank of Australia– tapering and/or tightening is being seen as being a much less likely prospect in the near future, as traders internalize the 'transitory' narrative.

That nonchalance towards inflation persisted despite a very strong PPI data out of China today. It was shown to have surged by 9% last month, against an 8.5% forecast, in a little signal that the Chinese economy may continue to export a bit of its inflation around the word. Not long after the release, Chinese policymakers announced some price controls, including on coal and some agricultural products, to contain rising costs and price pressures in their economy. China’s CPI figure was also released today, but that missed estimate at 1.5% year-over-year, and probably provided some reassurance that the PBOC doesn’t need to slam the brakes on policy right now.

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Heading into tonight’s trade, the Bank of Canada meeting will be the key event. The Bank of Canada isn’t tipped to adjust policy at all. However, having made itself firmly at home in the hawk’s nest, the markets will be watching for any further signalling that central bank sees further need to tighten policy, as it slowly tapers its asset buying going forward.

As it relates to the Loonie, fundamentals remain very supportive of the currency. However, in the short-term, the USD/CAD does look a touch oversold, with positioning in the CAD very bullish. A retracement for the pair looks well overdue – though the likelihood the Bank of Canada will spark such a move with a dovish surprise tonight is probably quite low.

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