BoC Abandons Hike Bias, Riksbank’s Turn to Decide on Policy

9 min readApr 25, 2019

The Canadian dollar slid yesterday, after the BoC fully abandoned its hiking bias. However, the currency recovered a large portion of those losses during Governor Poloz’s press conference. Perhaps investors interpreted Poloz’s remarks as being less worrisome than the tone of the statement. Overnight, the BoJ kept its ultra-loose policy unchanged and adjusted its forward guidance. That said, the yen barely reacted. As for today, the central bank torch will be passed to the Riksbank, where market participants may be eager to find out whether officials are still willing to hike later this year, or not.

BoC Removes Reference to Higher Rates, BoJ Tweaks Forward Guidance

The US dollar continued outperforming almost all the other G10 currencies. It gained the most against NOK, SEK and EUR. The only currency against which it failed to eke out gains was CHF, with USD/CHF found virtually unchanged this morning.

The Loonie ended the day lower against its US counterpart, but the ride was not a smooth one. The Canadian currency traded in a roller-coaster manner and responsible for that was the BoC. The Bank decided to keep interest rates unchanged at +1.75% as was widely anticipated, but the accompanying statement had an even softer tone than the previous one.

Officials reiterated that the global economy has slowed by more than they have forecasted in January and that the domestic economy is now expected to be slower in H1 2019. They also slashed their forecast for the year. The Bank now projects real GDP growth of +1.2% yoy, which is well below the +1.7% estimated in January. With regards to inflation, they noted that it is expected to remain around 2% through 2020 and 2021. The most interesting part though, was that the Governing Council fully dropped its hiking bias. Officials noted that an accommodative policy rate continues to be warranted and that they will “evaluate the appropriate degree of monetary policy as new data arrive”. This was the first statement since the end of 2017 without any reference to “future rate increases”. Even last time, they highlighted uncertainty about the timing of future hikes.

The Loonie tumbled at the time the statement was out but recovered a large portion of its losses during Governor Poloz’s press conference . The Governor noted that the economic slowdown is likely to prove temporary and that officials decided to remove the reference to future rate increases to emphasize the importance of data moving ahead. “We believe that this setting of interest rates will give us the outlook that we’ve got here, which is a positive outlook”, the Governor said. Perhaps, the market interpreted Poloz’s remarks as being less worrisome than the tone of the statement and that’s why the Loonie recovered.

Apart from the BoC, we also had a Bank of Japan decision during the Asian morning today. As was broadly expected, the Bank kept its ultra-loose policy unchanged, maintaining short-term interest rates at -0.1% and the target of 10-year JGB yields around zero. That said, officials revised their forward guidance, saying that they intend to maintain the current extreme low levels of interest rates for an extended period of time, “at least through around spring 2020”. This was the first time the Bank has included a specific timeframe. The Bank also said that it will consider the introduction of an ETF lending facility, a move that could address criticism that the Bank’s purchases hurt liquidity. With regards to the quarterly outlook of economic activity, officials downgraded slightly their GDP and inflation projections. Having said all that, the yen barely reacted on the Bank’s minor tweaks. It gained nearly 15 pips against its US counterpart, to just give them back in the following minutes.

CAD/JPY — Technical Outlook

CAD/JPY tumbled on the BoC rate decision but hit support fractionally below the 82.70 level and then, it rebounded to recover the lost ground. That said, the recovery was stopped near the 83.30 barrier, and subsequently, the rate came under renewed selling interest. The pair continues to print lower peaks and lower troughs below the prior upside support line drawn from the low of March 25 th, as well as below the downside resistance line taken from the high of April 17 th. Therefore, we would consider the near-term outlook to still be negative for now.

If the bears are willing to stay in the driver’s seat, then we would expect them to aim for another test near the 82.70 level, also defined by the inside swing highs of March 26 thand 27 th. However, in order to get confident on more downside extensions, we would like to see a decisive dip below 82.60. Such a break would confirm a forthcoming lower low on the 4-hour chart and may pave the way towards the 82.25 zone, near the low of March 29 th. Another break, below 82.25, could carry more bearish implications, perhaps setting the stage for the low of March 28 th, at around 82.00.

Looking at our short-term oscillators, we see that the RSI, already below 50, has turned down again, while the MACD lies below both its zero and trigger lines, showing sighs that it could also shift back south. These indicators detect negative momentum and support the notion for further near-term declines.

On the upside, we prefer to wait for a break above 83.50 before we abandon the bearish case. Such a move would bring the rate above the downside resistance line drawn from the high of April 17 thand may allow the bulls to drive the action up to the 83.90 area, defined by the peaks of April 22 ndand 23 rd. If that obstacle fails to stop the rate from pushing higher, then we could experience extensions towards the peak of April 17 th, at around 84.35.

EUR Tumbles on Weak Ifo Survey, The Riksbank Takes the Central Bank Torch

The euro was the third loser in line among the G10s, behind NOK and SEK, perhaps pressured by concerns with regards to the German economy. Yesterday, the Ifo survey showed that the current assessment index slid by more than anticipated, and while the expectations one was expected to rise somewhat, it declined as well. This brought the business climate down to 99.2 from 99.6, the forecast of which was for a rise to 99.9.

At their latest gathering, ECB officials reiterated the guidance that interest rates are likely to stay at present levels “at least through the end of 2019”, with President Draghi noting again that the risks surrounding the euro area economic outlook “remain tilted to the downside”. He also added that policymakers will consider “whether the preservation of the favorable implications of negative interest rates for the economy requires the mitigation of their possible side effects, if any, on bank intermediation”. Thus, combined with the disappointing Euro area PMIs for April, the worse-than-expected German Ifo survey may have amplified speculation for additional policy measures beyond the new round of TLTROs, which is expected to begin in September, as well as for another delay in the timing of when interest rates could start rising.

The Swedish Krona was also among the main losers ahead of today’s Riksbank decision. When policymakers of the world’s oldest central bank last gathered, they decided to keep interest rates unchanged at -0.25%, reiterating that the next increase is likely to come during the second half of 2019.

The somewhat better than expected inflation data for March may have heightened market participants’ expectations on that front, but, given that in previous years the Riksbank has been usually following the footsteps of the ECB, the continuous disappointment in Euro-area data, may have prompted investors to scale back some hike bets. Even yesterday, when the euro slid due to the weak Ifo survey, the Krona fell even more. Yes, on March 5th, Riksbank Deputy Governor Cecilia Skingsley noted that the plan remains for higher rates later this year, but this was two days before the ECB gathering, at which Draghi and co. decided to abandon plans for a 2019 hike. Therefore, it would be interesting to see whether Swedish officials are still willing to bring interest rates to zero later this year, or not.

EUR/SEK — Technical Outlook

EUR/SEK traded higher yesterday, hitting resistance near the 10.525 area. On Tuesday, the pair broke above the key resistance (now turned into support) zone of 10.495, which acted as the upper bound a sideways trading range. The rate had been trading in a sideways manner between that barrier and the 1.396 zone since March 15 th, and thus, the upside escape suggests that the short-term outlook has turned positive.

If the bulls are strong enough to overcome the 10.525 obstacle, then we could see them driving the battle towards our next resistance, at 10.556, defined by the high of March 14 th. If that level breaks as well, the recovery could be extended towards the 10.580 hurdle, marked by the high of March 13 th, or the 10.590 zone, defined by the peak of the previous day.

That said, our short-term oscillators suggest that a minor corrective setback may be on the cards before the next positive leg, perhaps for the rate to test the 10.495 area as a support this time. The RSI has flattened near its 70 line, while the MACD, even though above both its zero and trigger lines, shows signs of topping.

On the downside, a dip back below the 10.475 level, or even better, below the upside support line drawn from the low of April 1 st, could confirm the rate’s return within the aforementioned range and turn the outlook back to neutral. We could then experience more declines within the range, with the bears initially aiming for the 10.448 support, the break of which may allow them to put the 10.432 hurdle on their radars. That barrier provided strong support on April 16 thand 17 th.

As for the Rest of Today’s Events

Besides the Riksbank decision, we also have the US durable goods orders for March on the agenda. The consensus is for the headline rate to have rebounded to +0.7% mom from -1.6%, while the core one is forecast to have ticked up to +0.2% mom from +0.1%. Initial jobless claims for the week ended on April 19 thare also due to be released and forecast is for a rise to 199k from 192k the week before.

As for tonight, during the Asian morning Friday, we get the usual end-of-month data dump from Japan. Getting the ball rolling with the employment numbers, the unemployment rate is expected to have risen to 2.4% in March from 2.3% in February, while the jobs-to-applications ratio is forecast to have ticked up to 1.64 from 1.63. The preliminary industrial production for the month is expected to show a slowdown to +0.1% mom from +0.7%, but retail sales are anticipated to have accelerated to +0.8% yoy from +0.6%. We also have the Tokyo CPIs for April. The headline rate is expected to have risen to +1.1% yoy from +0.9%, while the core one is forecast to have held steady at +1.1% yoy.

We also have one speaker on today’s agenda: ECB Vice President Luis de Guindos.

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Originally published at https://www.jfdbank.com on April 25, 2019.