Global macro overview for 28/09/2018
During yesterday’s speech, Stephen Poloz said that the Bank of Canada will gradually raise interest rates until monetary policy is normalized. Uncertainty about the situation in the future is not a sufficient reason to keep interest rates unchanged. The decisions of the central bank will continue to depend on macroeconomic publications and other sources of information. If interest rates are raised too slowly, the economy may overheat and inflation will accelerate too much and will be unstoppable. In turn, too fast rate growth may stifle Canada’s economic potential. The latest inflation data confirm that the bank’s activities are adapted to current market conditions. Although the last inflation reading was well above the target (2.8%), 0.5 pp. corresponds to a temporary increase in the price of gasoline, and 0.3 p.p. more expensive air travel. In general, monetary policy should not rely on mechanical action, but rather on risk management. New digital technologies make it more difficult to assess the issue of demand and supply. The bank is still collecting data as to whether new mortgage lending tips affect the real estate market. According to Poloza, the economy has become more sensitive to higher rates.
According to the president of the Bank of Canada, the new NAFTA agreement will be signed, although he does not know in what form. Poloz thinks that the Canadian economy has reduced ties with the US over the past 15 years. The USDCAD price depends on oil prices and the difference resulting from the US and Canadian interest rates. Analysts were concerned about the independence of Canada. Perhaps this country is less dependent on its southern neighbor, but a trade agreement will be necessary anyway because it is hard to imagine a Canadian economy without such a big market as the United States. The Canadian dollar has slightly strengthened at night, but it is not known whether this will be due to Poloz.
Let’s now take a look at the USD/CAD technical picture at the H4 time frame. The market has hit the technical resistance zone between the levels of 1.3078 – 1.3113 and the response from the supply side was immediate. The price has pulled-back and now is trading around the level of 1.3024, just above the round level of 1.3000. The market conditions are overbought and the momentum is weak but still positive. The global investors await the Canadian data, that might improve the sentiment and trigger the spike above the resistance.