Two Monetary Policies Diverge in the Woods

The Canadian dollar took a sharp tumble on the contrast between the Bank of Canada's price cut and Yellen's verification that the Fed is still on track to hike rates later this year. 

The Bank of Canada cut its overnight price 25 bp to Zero.5%, the second cut this year.  It cited the impact of the drop in oil prices and the failure to non-energy exports to pick-up the slack. 

After contracting in Q1 and April, the Canadian economy expects to contract in H1.  The central bank cut this year's GDP forecast to 1.1% through 1.9% it made in April.  The fact that the Bank noted the output gap is significantly bigger than previously understood is a dovish entrance.  It means that the central bank may still have an easing prejudice, though many, including us, suspect this is the last decline in the cycle.

The US dollar shot through its hurdle around CAD1.28 to reach nearly CAD1.2930.  These are new multi-year highs for the greenback.  It is difficult to speak of resistance when the levels have not been in seven years.  A few talk about a test on CAD1.3000-30.  A break of CAD1.2880 would signal a good intra-day high is in place.  The actual markets await Poloz’s remarks before the longs want to take profits. 

The New Zealand dollar is also trading at new multi-year levels following the disappointing milk public sale.  The RBNZ meets on July 23.  The market fully anticipates a 25 bp reduce then.  It is debating an additional move.  The Kiwi and Canada are competing, as it were, for that big loss on the day.  Both are down around 1.3%.  The following target for the Kiwi comes in close to $0.6575.