Of the 3 commodity currencies, the biggest story this past week was in Canada. Since the last monetary policy meeting, investors have been looking for another rate hike from the Bank of Canada this year. Their expectations were fueled by hawkish comments from Finance Minister Morneau who said Canada can continue to do well at these dollar levels and higher interest rates are expected given the performance of the economy. However Bank of Canada Governor Poloz halted the rally and sent the loonie tumbling when he indicated that another rate hike was not a done deal. The BoC head said there is no predetermined path for Canada interest rates and they won’t be mechanical on rates because inflation and wage growth is slower than they anticipated. They plan to proceed cautiously which basically means there will be no rate hike in October and a lower chance of tightening in December.
The economic progress we have seen tells us that the moves we took to ease policy in 2015 were the right thing to do. At a minimum, that additional stimulus is no longer needed. But there is no predetermined path for interest rates from here," Poloz said in the conclusion of his speech.
He went onto say that data will be particularly data dependent, could be surprised in either direction and will "feel our way cautiously".
The bulk of the speech tends to focus more on downside risks. Poloz notes that inflation has undershot the target for years and that "we do not yet know the full extent of the economy's reaction to various macroprudential measures aimed at imbalances in the housing market."
Prior to the speech, the market was pricing in a 38% chance of an October hiked and a 68% chance it would come in December instead. That rises to 90% by next March.
After reading the speech, the chance of an October hike sounds closer to 5% and certainly less than 50% in December.
The BoC is not happy with the rise in the currency and with supply growth likely to restrain inflation, the mere suggestion that they could be done tightening for the year was enough to send USD/CAD above 1.25. Although USD/CAD recovered those losses softer GDP growth and the decline in Canadian yields should catch up to the currency. Canadian labor market numbers are due for release in the coming week along with the IVEY PMI report and retail sales.
The economic progress we have seen tells us that the moves we took to ease policy in 2015 were the right thing to do. At a minimum, that additional stimulus is no longer needed. But there is no predetermined path for interest rates from here," Poloz said in the conclusion of his speech.
He went onto say that data will be particularly data dependent, could be surprised in either direction and will "feel our way cautiously".
The bulk of the speech tends to focus more on downside risks. Poloz notes that inflation has undershot the target for years and that "we do not yet know the full extent of the economy's reaction to various macroprudential measures aimed at imbalances in the housing market."
Prior to the speech, the market was pricing in a 38% chance of an October hiked and a 68% chance it would come in December instead. That rises to 90% by next March.
After reading the speech, the chance of an October hike sounds closer to 5% and certainly less than 50% in December.
The BoC is not happy with the rise in the currency and with supply growth likely to restrain inflation, the mere suggestion that they could be done tightening for the year was enough to send USD/CAD above 1.25. Although USD/CAD recovered those losses softer GDP growth and the decline in Canadian yields should catch up to the currency. Canadian labor market numbers are due for release in the coming week along with the IVEY PMI report and retail sales.