BoC is sneakily doveish 9Sep15


BoC is sneakily dovish

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • BoC leaves rates unchanged
  • USDX suggests further range trading ahead
  • "A rate hike would cause a panic and turmoil" – really?

The denizens of the BoC’s landmark HQ are more dovish than hawkish. Photo: BoC

By Michael O’Neill

The Bank of Canada surprised no one when it left rates unchanged this morning.

The initial reaction to the statement led to USDCAD plunging from 1.3260 to 1.3160 immediately. Obviously, the statement was a tad on the hawkish side. It wasn’t!

The BoC appears to have made a concerted effort to attribute stability in inflation and reduced fall-out from lower commodity prices to the Canadian dollar. The statement also noted that the domestic economic recovery continues to be underpinned by firm recovery in the US, with particular emphasis on Canadian exports.

All of the above implies that not only is the BoC happy with the current level of the Canadian dollar, they wouldn’t shed any tears if it weakened further.

There is nothing in today’s statement that would suggest that further rate cuts are unlikely. In fact the door is wide open for another cut due to the uncertainty from China and its impact on the pace of the global recovery.

Panic and turmoil, oh my

Sound the alarm. Emerging market economies will suffer “panic and turmoil” if the US Federal Reserve raises rates in September, at least that is what the World Bank’s chief economist, Kaushik Basu, claims in a Financial Times story today.

Larry Summers, a former US Treasury Secretary and Barack Obama advisor, is also urging the Federal Reserve to leave rates unchanged, not out of concern for “shocking” emerging market economies, but because it would be a “serious mistake”.

The “hike or not to hike” debate has been raging since December 17, 2014 when the Federal Open Market Committee (FOMC) dropped the phrase “considerable time” and replaced it with “patience”. In March, 2015, the FOMC lost “patience” from the statement and global financial markets have been in a state of high anxiety, ever since.

If emerging market economies would truly be “shocked” and suffer “panic and turmoil”, as the World Bank economist claims, they deserve their fate. The possibility of a US rate hike in 2015 should not be a surprise to anyone, at least anyone not in a coma since last Christmas.

In fact, Larry Summers, in his column in today’s Financial Times, made the best case for a rate hike even though he was arguing for rates to be left as is. Summers noted that “markets have already done the work of tightening”. If he is to be believed, then a 0.25% rate increase would be a non-event. Get on with it, Ms. Yellen and let markets turn their attention to more important matters, like the next US rate hike.

US dollar index indecisive

The US dollar index has been a poor guide of general US dollar direction since the beginning of May. In fact, it has be trading rather raggedly within a 93.15–98.80 range which goes a long way in explaining the broad range trading seen in many currency pairs, particularly EURUSD. (which is 57.6% of the index)

Chart: USDX currency weightings

Source: ICE Futures

The bounce off the August 24 spike low of 92.52 hit a ceiling at 96.65 on September 3 and since then USDX has fluctuated within a 1.00 point range. A break above 96.65 targets 98.40 which if broken argues for a retest of the 2015 peak. A move below 95.00 would open the door for a deeper correction to the 92.00-92.25 area.

USDX 1 hour with short-term range highlighted

Source: Saxo Bank

Canada election polls another Loonie negative

The Canadian federal election is still forty days away which is apparently a very long time in an election campaign. However, to paraphrase the words of world famous rabbit hunter, Elmer Fudd, “Be ve-w-wy, ve w-wy worried”.

The latest polls show the socialist NDP party led by Thomas Mulcair in the lead with 122 seats (169 seats is a majority) while the incumbent PC (Progressive Conservative) have a mere 104 seats. (which may be because voters can smell that the Prime Minister, Stephen Harper, is well past his best-before date.) The third place Liberal Party with 111 seats is ideologically similar to the NDP and those parties are already talking about a coalition.

An NDP/Liberal coalition government have never seen a taxpayer’s dollar that they couldn’t spend better. The result would be a ballooning budget deficit and higher taxes across the board.

Latest seat projections from various polls (September)

Source: Election Almanac

– Edited by Clare MacCarthy

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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