CAD Back on the Defensive

There are 55 reasons to watch the Canadian dollar in the day ahead. The loonie was the worst performer Wednesday after the BOC decision while the US dollar led the way.  Later, the Asia-Pacific calendar is focused on AUD.

USD/CAD is flirting with the 55-day moving average after its largest one-day gain since May. The pair climbed 150 pips after the Bank of Canada decision. There was no change in rates and the BOC guidance remained neutral but forecasts revealed a dovish shift.

The BOC closely monitors the output gap which is the amount of spare capacity in the economy or how much growth is possible before it creates inflation. It's the metric around which BOC decisions are made. The BOC had predicted it would close in H1 2017 but pushed that out to mid-2017 after lowering growth forecasts in 2015 and 2016.

They also lowered inflation forecasts for next year and that leaves little room for more slack before the BOC will cut rates to 0.25% from the current 0.50% overnight rate.

If that happens may depend largely on oil. To underscore CAD's dependency on oil, WTI crude is also flirting with the 55-dma. It's at $44.86 which is precisely what the low was Wednesday. Oil prices declined after US inventories expanded another 8m barrels after a 7.6m build last week. The market was looking for just a 3.9m barrel increase.

As oil goes, so will CAD. A third factor could topple or support both. The worries in broader markets began to percolate in Chinese stocks yesterday as the Shanghai Composite fell 3.1% after touching a 7-week high earlier. It's the largest one-day decline since Aug 25 however the losses were pared by about 1% late in trading.

We'll keep a close eye on China in the day ahead. What happens there will also drive the Australian dollar along with a speech from the RBA's Edey at 2245 GMT and NAB business confidence at 0030 GMT. Otherwise the Asia-Pacific  calendar is light.