April showers were plentiful, but so was top-tier data, which was crucial to the May 1 FOMC interest rate decision. The Fed was expected to cut rates three times in 2024, but the odds for such moves had been slowly deteriorating. Part of the reason was that Fed Chair Jerome Powell repeatedly stressed that future decisions would be determined by incoming data. Throughout April, a series of US inflation reports, stronger than expected GDP growth, and a labor market easing extremely slowly fueled speculation that the Fed would adopt a hawkish stance at the May FOMC meeting.
That sentiment fueled US dollar gains across the G-10 spectrum because the Bank of Canada (BoC), European Central Bank (ECB), and Bank of England (BoE) were on pace to cut interest rates, which widened interest rate spreads in favor of the greenback.
The long-awaited Bank of Japan FX intervention to sell US dollars and buy JPY finally occurred on the last day of the month when USDJPY traded at 160.04.
The USD and Federal Reserve
The FOMC meeting was on May 1, and it was rather anticlimactic. The Fed left its benchmark rate unchanged, and the statement was largely unchanged, except for the part where it announced a reduction in the size of monthly bond redemptions. The market action was choppy in the aftermath of the meeting, but by the next day, the US 10-year Treasury yield was sitting at 4.57%, and the US dollar index had dropped to 105.26. The catalyst was that although Mr. Powell said the Fed was in no rush to ease, he admitted that the next move was likely lower.
FX price action was driven by economic data in April, and the same will hold true for May.
The Canadian Dollar and Bank of Canada
The Canadian dollar traded defensively throughout April. That was due to widening Canadian and US interest rate differentials in favor of the US and because the price action mirrored broad US dollar moves against the G-10 major currencies. But it was mostly a US dollar story rather than a made-in-Canada tale.
April’s USDCAD peak of 1.3850 may cap gains this month. That’s because traders may downgrade expectations of a BoC rate cut in June.
Governor Tiff Macklem told the House of Commons finance committee that “Our interest rates in Canada don’t need to be the same as the U.S. rate or global rates. But there is a limit to how far they can diverge.” The obvious reason is because the Canadian dollar would plummet. Nevertheless, he followed that comment with “we are not there yet.” The idea that the BoC may be less dovish than previously expected will limit Canadian dollar losses.
Oil Price
Oil traders are not feeling the love. West Texas Intermediate dropped over 10.5% from April 14 until May 1. Bullish positions established due to Iran and Israel exchanging missiles were unwound steadily after the initial hostilities did not escalate. Traders were also concerned that the Fed’s decision to leave rates at current levels for longer than expected would negatively impact global growth. The WTI technicals are bearish below 83.00, looking for a test of 75.00.
Bank 2024-USD/CAD Q2 2024-USD/CAD Q3
Scotiabank* 1.3600 1.3300
BMO 1.3700 1.3500
CIBC 1.3700 1.3500
TD Bank* 1.3900 1.4100
National Bank 1.3800 1.4000
*Forecast is based on last month. Forecast Table is for mid-market rates, and subject to change anytime.
