CAD in the Crosshairs

A rate cutting hint from Poloz cut down the Canadian dollar while a soft Western response continued to characterize Crimea and boost risk trades. The kiwi and aussie were top performers while the loonie lagged. Japanese trade balance is the highlight of the trading calendar with the FOMC meeting due in the day ahead.  

Sizeable moves and significant volatility characterized US trading. The biggest move came in the Canadian dollar. USD/CAD fell to a one week low in early trading as commodity FX and risk trades rallied but it was quickly clear there would be no appetite to buy the loonie. Poloz sparked two waves of USD/CAD buying, the first after he warned that Feb inflation would be low and Q1 GDP soft. The second was when he responded to a journalists' question to say he wouldn't rule out rate cuts if downside risks to inflation rose. USD/CAD rose more than a cent on the comments.

A final piece of bad news hit the loonie when long-serving Canadian finance minister Flaherty resigned. He was a deficit hawk and his replacement will be more apt to spend after the budget is balanced in 2015.

Economic data included a slightly soft reading on Feb US CPI at 1.1% y/y compared to 1.2% expected but it won't change the Fed's decision to taper $10 billion on Wednesday.

The main market focus remains the Ukraine. Putin struck a balanced tone in a nationalistic speech after annexing Crimea and said Russia isn't interested in taking over Eastern Ukraine. That sent risk assets higher but markets were still cautious awaiting a White House response. The response was limp as the US said its G7 allies will meet next week to discuss Crimea. That gave a boost to stocks but USD/JPY was curiously saggy and tested 101.20 once again. That will be a critical level in the day ahead. 

One event that could help or hurt the yen is the February trade balance data due at 2350 GMT. A 600B yen deficit is expected.