CAD’s recovery stalled ahead of BOC meeting and elections
USD/CAD rose for the first time in five days by 0.6% to 1.3956. USD/CAD has been unable to break below 1.3830 after its plunge (driven by a “death cross” formation) from 1.4275 to 1.3875 over April 9-11. The next resistance levels are 1.40 and 1.4050 or the 38.2% and 50% Fibonacci retracement levels of this month’s decline.
Despite the consensus for the Bank of Canada to keep rates unchanged at 2.75% today, the OIS market has not ruled out a surprise cut, which it assigned a 40% probability. CPI inflation cooled to 2.3% YoY in March from 2.6% in February, while the average of the BOC’s two preferred core inflation rates moderated to 2.85% from 2.9%. The net change in employment turned negative in March; the -32.6 reading was the worst since January 2022. Companies have slowed or halted investment and hiring because of Trump’s tariffs. According to a BOC Survey, 66.5% of consumers and 32% of businesses expect a recession over the next year. The BOC quarterly monetary policy report should reinforce the highly uncertain outlook confronting the Canadian economy. Last month, BOC Governor Tiff Macklem said the BOC might present a range of growth estimates instead of a single forecast because of the flip-flopping in America’s tariff policy.
As for Canada’s federal election on April 28, polls indicate that the Liberals have a better chance of securing a majority than the opposition Conservatives. However, the polls also showed that the Liberals, led by Prime Minister Mark Carney, would be better suited to managing Canada’s complex relations with the Trump administration and the Conservatives in addressing domestic economic issues, namely, the cost-of-living worries. A Labour victory would lead to policies that strengthen Canada’s economic independence and resilience from the US economy, promote sustainable energy development, reinforce national defence, affordable housing initiatives, financial support for consumers, and middle-class tax relief.
EUR takes a breather
EUR/USD depreciated 0.6% to 1.1282, below 1.13 for the first time in three days. EUR/USD can trade lower and realign with the significantly narrower EU-US 10Y yield differential this month. The US yield has eased in the past two sessions, driven by the efforts of US Treasury Secretary Scott Bessent to reaffirm America’s commitment to a strong dollar policy. If so, this could return focus to the Eurozone’s tough economic outlook.
We expect the European Central Bank to cut its deposit facility rate by 25 bps to 2.25% at tomorrow’s meeting. The OIS market sees the ECB lowering rates again to 2% in June and 1.75% in September, the floor of its estimated neutral range of 1.75-2.25%. Although the ECB does not target the exchange rate, ECB President Christine Lagarde will likely point to the EUR’s recent appreciation as a factor holding inflation down and adding to the headwinds posed by US tariffs.
The accompanying ECB Survey of Professional Forecasters should also reflect downgraded growth expectations, affirming that the defence and infrastructure spending under the “ReArm Europe” Plan would not offset the immediate headwinds due to the negative impact of US tariffs. Trump’s tariffs weighed heavily on investor sentiment in Germany. According to the ZEW Survey, expectations collapsed to -14 in April from +51.6 in March, its first negative reading since October 2023. The outlook for the next six months fell across all industries, with the weakest readings in automobile (-76.5), steel (-52.9), chemical and pharmaceutical (-42.2), and mechanical engineering (-40.8).
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