Leader of the Pack
· Cautious Yellen stance validated by weak US retail sales and CPI data
· Will ECB’s Draghi offer any surprises at next week’s news conference?
· Bank of Canada changes the playbook as low inflation becomes temporary
Canada’s central bank became Leader of the Pack, as it was the
first among the G10 to hike rates outside the US. Photo: Shutterstock
By Michael O’Neill
Bank of Canada governor Stephen Poloz is the Leader of the Pack. He is the Jax Teller of the Central Bank Sons of Anarchy, having usurped Janet Yellen’s Clay Morrow character in the battle against inflation.
In January 2014, the Bank of Canada cut its overnight rate to 0.50% due the negative impact on inflation from falling oil prices. The BoC governor threatened to cut them again in January 2017 if US protectionist policies put “our inflation target at risk.”
It appeared to be working as Canadian inflation rose to 2.1% in February. But Canadian interest rates didn’t rise. They remained near record-low levels because inflation declined steadily, and posted a paltry 1.1% rise in June.
Canadian inflation stays tame
When the plan isn’t working, change the terminology. On July 12, the risks of falling inflation putting the BoC inflation target at risk vanished. Low inflation became temporarily low inflation, and that temporary status allowed the BoC to raise interest rates.
US Federal Reserve chief Janet Yellen has been wrestling with the same low-inflation problem as the BoC’s Poloz. That didn’t stop her from raising interest rates. The Fed funds rate has been hiked twice in 2017, but a third increase is looking doubtful. Weak US retail sales and inflation data on Friday lowered the odds of a December hike to 43.1% from 47.3% before the release.
Where does that leave the European Central Bank? We will know next week as the ECB governing council meets on Thursday. But if the new central bank policy playbook includes revised low-inflation descriptions, a slightly hawkish ECB president Mario Draghi shouldn’t be a complete surprise.
The week ahead
The ECB meeting on July 20 will be the major focus as will a Bank of Japan meeting that same dam. US traders will be distracted by US president Donald Trump’s healthcare bill and corporate earnings releases.
Monday, Japan is closed for Marine Day. China retail sales, industrial production and GDP data will be the key focus for AUDUSD and NZDUSD traders. A big upside surprise in Eurozone CPI would be needed to elevate the drama ahead of the ECB meeting on Thursday. There isn’t any data from the US.
Tuesday will be quiet. New Zealand inflation and the Reserve Bank of Australia meeting minutes are on tap, which could cause a brief stir. Sterling traders will deal with inflation data. The US housing market index is the best the US has to offer
Wednesday is likely to be another quiet session as traders mark time ahead of Thursday’s ECB meeting.
Thursday kicks off with Japan trade data and Australia employment, followed by the Bank of Japan policy meeting and news conference. The BoJ meeting shouldn’t produce any surprises. The surprise could come from Draghi, especially if he talks about tapering of quantitative easing at the press conference after the ECB’s governing council meeting.
Friday will be a day of rest for most regions, except Canada where retail sales and CPI data are due.
The ECB’s governing council meets in Frankfurt on
Thursday, July 20. Photo: Shutterstock
The week that was
This week was expected to get off to a slow start — and it did.
On Monday, in Asia, US dollar bulls were basking in the glow from Friday’s US employment numbers. AUDUSD inched higher while the kiwi traded sideways. China CPI ticked lower (actual -0.2 versus forecast -0.1), but didn’t cause any problems. USDJPY climbed to 114.25 from 113.85 on increased odds of another Fed rate hike in 2017. The rally peaked in Europe, and USDJPY dropped back to 114.00 where it closed in New York. EURUSD drifted in a 1.1380-1.1405 range the entire day, and GBPUSD bounced in a 1.2855-1.2903 band. There was no US data of note.
Tuesday was Monday all over again. FX ranges were tight although data releases put some life into kiwi and aussie. A-better-than expected Australian business confidence survey gave AUDUSD a lift, while soft New Zealand electronic card sales undercut NZDUSD, which dropped from 0.7274 to 0.7204 my lunchtime in New York. That proved to be the low for the week.
European traders were entertained by the ebb and flow of sterling. A rally from 1.2871 to 1.2926 vanished after Bank of England deputy governor Ben Broadbent failed to talk about interest rates in a speech. EURUSD spiked to 1.1480 from 1.1380 after Donald Trump Jr’s (the president’s eldest son’s) emails with a Russian offering “dirt on Hillary” became public.
On Wednesday, the emails were the entertainment in Asia and led to USDJPY selling. The euro dropped from its Asia peak of 1.1488, undermined by ECB officials’ efforts to downplay any risk of quantitative easing tapering any time soon. Sterling traded in a narrow band in Asia and then dropped to 1.2813 from 1.2854 in Europe. The move was erased when the UK posted a 43-year low in the unemployment rate (Actual 4.5%).
USDCAD plunged to 1.2680 from 1.2935 after the Bank of Canada raised rates by a quarter point, to 0.75%, and delivered a hawkish outlook. A rally in oil prices helped the move.
Fed chief Yellen triggered a dollar retreat and equity market rally when she said that interest rates were close to neutral and not in need of rising much more.
On Thursday, Yellen’s dovish stance reverberated across Asia. The antipodeans rallied, supported by strong China trade data. USDJPY sank to 112.86 as US rate hike expectations got pared back. EURUSD climbed to 1.1455, but that move didn’t last, and the pair opened in New York where it closed on Wednesday. Sterling added to Wednesday’s gains, climbed to 1.2952 and spent the rest of the day bouncing between 1.2915 and 1.2952. US data was a nonevent, and day two of Yellen’s testimony didn’t provide any fresh insight.
On Friday, the Asian and European sessions were dull ahead of major US data releaes. Retail rales and CPI were weaker than expected, and the US dollar tumbled across the board.
It wasn’t a good week for the greenback. Photo: Shutterstock
— Edited by John Acher
Michael O’Neill is an FX consultant and currency strategist at Loonieviews.net