Speech from BoC Governor Poloz to set the tone for CAD
Tuesday 13 March, 2018
Daily Currency UpdateAfter the sharp rally seen on Thursday and Friday, the Canadian Dollar was back at the bottom of the table on Monday, though we’d repeat our warning not to read too much into currency movements on what was actually a fairly quiet day in the Northern Hemisphere. USD/CAD hit a low of 1.2805 in Asia yesterday and only moved around a quarter of a cent higher over the next 12-15 hours. Overnight in Asia and in Europe this morning, the pair has crept steadily higher to a best level around 1.2860.
Canadian Finance Minister Bill Morneau said during a visit to London on Monday that there are parallels between the way companies in North America and Britain are holding back on investment as they respectively wait for clarity on the re-negotiation of NAFTA and the outcome of talks on a Brexit deal. “There are some businesses that are being cautious in investments because there is an expectation that NAFTA could be slightly different tomorrow than it was yesterday… What’s been clear from the American standpoint is they are anxious to have a conclusion to NAFTA as near term as possible - we’re trying to work constructively towards that goal.” On Canada’s future trading partnership with the UK -which is currently under the Comprehensive Economic and Trade Agreement - Morneau said any post-Brexit arrangement would have at least as much trade as the two countries enjoy currently. “To the extent that we can get a better arrangement with the UK in the future, that’s positive.”
BoC Governor Stephen Poloz is due to make a speech later today which will be closely analysed for further clues on monetary policy. Deputy Governor Tim Lane last week said, “We’ve been balancing the risk of undermining the economic expansion by moving too quickly with the risk of delaying too long and needing to raise rates sharply later to rein in inflation.” The market isn’t fully pricing in the next rate increase - which would be the fourth in the cycle - until July and expects two to three more hikes during the course of this year. The Canadian Dollar opens in North America at USD/CAD1.2860, AUD/CAD1.0115 and GBP/CAD1.7855.
Key MoversThe US Dollar fell modestly on Monday; a day which brought no fresh incoming economic news and few further developments in the trade tariff saga. Its index against a basket of major currencies had ended last week around 89.70 and by close of business in New York it had slipped just a couple of tenths to 89.50. The USD was down against the GBP and EUR, as well as the Antipodeans, but finished up against the CAD. In stock markets, meantime, the DJIA managed to turn a 150-point gain into a 100-point loss close of business in New York though futures markets overnight have seen these losses largely reversed.
Ahead of today’s US CPI figures, the New York Federal Reserve Bank yesterday released its regular survey of consumer expectations, which the FOMC considers among other data as it continues to gradually raise interest rates. The survey showed median one-year ahead inflation expectations rose to 2.83% from 2.71% in January and the highest reading since February 2017. The three-year measure was 2.88% in February, up from 2.79% the month before. The New York Fed survey, in which an outside polling company questions a rotating panel of about 1,200 household heads, found last month’s rise was driven by higher-educated respondents. Their uncertainty around the inflation expectations were the lowest ever recorded.
Today we’ll find out if expectations of higher inflation are borne out by the official CPI data. The headline inflation rate is expected to tick up to 2.2% y/y from 2.1% which would mean annual CPI has remained at or above 2% for the past half a year. The core rate excluding food & energy costs is expected to remain unchanged at 1.8% for the third consecutive month in February. It would also be the eleventh month of below-two-percent gains in the core year-over-year measure. Bear in mind that unlike the RBA, RBNZ or BoE, the Federal Reserve doesn’t have a CPI target. Instead, it looks at the core PCE deflator which is still some way below its preferred 2.0% level. After the inflation numbers, on Wednesday we have retail sales and then towards the end of the week it’s housing and industrial production data. The USD index opens this morning in North America around 89.60.
EUR/USD spent most – but not all – of Monday on a 1.23 ‘big figure’ with its best level just under 1.2340 coming early in the European morning. Having dipped to a low just above 1.2290 by lunchtime, the EUR then clawed its way back on to 1.23 to finish mid-table on our one-day performance chart in what was in truth a pretty lacklustre session for most of the major currencies. In the 12 hours of Asia overnight and this morning in Europe, just 25 pips separated the high and low for EUR/USD and it has settled around the mid-point of its range, lacking both direction and momentum.
Yesterday afternoon in Brussels there was a meeting of the Eurogroup; an informal body in which the ministers from the euro area member states discuss matters relating to their countries' common responsibilities related to the euro. Its main task is to ensure close coordination of economic policies among the euro area member states and promote conditions for stronger economic growth. The Eurogroup's discussions therefore cover specific euro-related matters as well as broader issues that have an impact on the fiscal, monetary and structural policies of the euro area member states. Reuters reports that the President of the European Central Bank told finance ministers that conditions have been already met to at least begin talks on the first phase of a common European Deposit Insurance Scheme, although Germany, the euro zone’s largest economy, wants banks in the bloc to get healthier before a common insurance scheme for depositors is set up. Berlin fears EDIS would force German lenders to pay for losses at weaker banks in other states; the very same approach which saw it take such a hard-line in Greek bailout negotiations. We’ll have to wait and see if a new Coalition government changes its approach.
The main events in the Eurozone come tomorrow with the final German CPI numbers ahead of those for the wider Eurozone on Friday. There are plenty of Central Bank speakers on Wednesday too, with President Draghi, Vice President Constancio and Chief Economist Peter Praet all scheduled. The EUR opens in North America today at USD1.2330 and EUR/CAD1.5850.
The British Pound finished on Monday as the top performer of the day, just edging the Australian Dollar into second place on our one-day table. GBP/USD was initially sold down to a low just above USD 1.3840, but was then boosted by talk of an agreement on a post-Brexit transition deal and GBP/USD hit 1.39 at the end of the London afternoon. Overnight in Asia and this morning in Europe, it has slipped back a little and though trading ranges remain tight, the pound is actually lower against all the major currencies we follow closely here.
As markets await the more serious business of the Chancellor’s Spring Statement (see below) we can’t resist a Press Release from the UK Office for National Statistics which today reports changes in the basket of goods which comprise the CPI index. The statisticians note that, “Every year we add new items to the basket to ensure that it reflects modern spending habits. We also update the weight each item has to ensure the overall inflation numbers reflect shoppers’ experiences of inflation. However, while we add and remove a number of items each year, the overall change is actually quite small. This year we changed 36 items out of a total basket of 714.” Women’s exercise leggings and action cameras such as GoPros have been added to the basket of goods and services used to calculate inflation. In addition, new food items added to the 2018 list include raspberries, quiche and prepared mashed potato. The rise of the smartphone means digital camcorders no longer feature in the basket, while digital media players such as Chromecast and Apple TV have replaced digital TV recorders and receivers such as Freeview boxes. Other items added to the 2018 basket include body moisturising lotion, girls’ leggings and high chairs. Items removed include peaches and nectarines, leg waxing and ATM charges.
Thoughts now turn to Tuesday’s Spring Statement from the Chancellor of the Exchequer. There is the chance of a rare upgrade to UK economic forecasts after the incoming data over the past few months have shown the Office for Budget Responsibility was too pessimistic in its assumptions on UK productivity. There are no longer any changes to taxes announced in March as the UK tax year begins on April 6th and the Chancellor has said he prefers to make these announcements in the Autumn to give time for consultation on detailed implementation. The OBR’s numbers, then, will likely take centre-stage in this new set-piece event which, according the BBC will comprise just a brief 15-minute statement to MP’s at 12.30GMT. The British Pound opens in North America at USD1.3895, GBP/EUR1.1265 and GBP/CAD1.7860.
The AUD on Monday extended its gains to a third day and overnight has been on to a best level of USD0.7885; just over a cent above last Thursday’s 0.7775 low. The trading ranges have been pretty narrow, however, and it would be unwise to read too much into the price action. Indeed, just 25 pips separate the high and low of AUD/USD over the past 24 hours.
The highlight in Australian economic news today is the well-respected NAB monthly business survey. The business conditions index moved 3 points higher to +21. This is a record high since the monthly survey commenced in March 1997, although the same measure in NAB’s quarterly survey reached this level in 1994. In contrast, the business confidence index declined by 2 points to +9. According to NAB, “The fall in confidence may reflect the turbulence seen in international financial markets in early February, but confidence remains above average suggesting that the impact was relatively limited”. The strength in business conditions wass broad-based with all major industry groups reporting above-average conditions. NAB noted, “The gap between the best and the softest performing industries is at a relatively low level with even the underperforming retail sector recording its highest reading in eight months. That said, the trend down in personal & recreational services over the past four months needs to be watched closely as it could indicate that softness in consumer spending is broadening beyond retail.”
It is striking that even a record high for NAB’s business conditions sees the bank hedging its bets on the interest rate outlook. It recently removed one of the two hikes in its 2018 forecast profile and now says, “We expect by late 2018 the RBA will feel relaxed enough about the domestic fundamentals to cautiously start withdrawing the stimulatory policy stance it is currently running. However, it will depend heavily on the data flow and the risk is that the RBA will delay rate rises until early 2019.” The Australian Dollar opens in North America this morning at USD0.7875, with AUD/NZD at 1.0750 and AUD/CAD1.0125.
Volatility has resumed in the New Zealand Dollar which once again tops the table as we reach the half-way point of the global trading day. NZD/USD is back on a 73 cents handle and the overnight high around 0.7330 is the best level in more than two weeks. AUD/NZD is down more than a quarter of a cent to the mid-1.07’s whilst NZD/CAD is up more than half a point from Monday’s close at 0.9415.
The Reserve Bank of New Zealand’s (RBNZ) outgoing governor said today that the bank’s use of macroprudential tools had successfully insulated the financial sector from the risks of a hot housing market and that its policy toolkit should be expanded. Governor Grant Spencer said that a planned review of the bank’s use of macroprudential policy in 2018, five years after it was first adopted, should consider the ways in which the success of the tools could be built on. “While we stated at the outset in 2013 that LVRs (loan to value restrictions) would be temporary, I believe there is a case to consider maintaining a policy infrastructure of this sort, with policies being adjusted through time between binding and non-binding settings.” Mr. Spencer also recommended the introduction of a new committee to make decisions around macroprudential policy, which would sit alongside the bank’s monetary policy committee, with some overlap in members.
The RBNZ slightly eased back some of its LVR restrictions in January after a sharp slow-down in house price inflation towards the end of 2017. House prices have since recovered, growing at an annual rate of around 6.5 percent for the past three months. The timing of Mr. Spencer’s speech is very interesting, coming on the day before the always-fascinating REINZ house price report is released and should keep the topic very much a live one for debate. The Kiwi Dollar opens in North America at USD0.7325 and NZD/CAD0.9315.
- USD/CAD: 1.2805 - 1.2905 ▼
- CAD/EUR: 0.6260 - 0.6345 ▼
- CAD/GBP: 0.5570 - 0.5635 ▼
- CAD/AUD: 0.9805 - 0.9930 ▼
- CAD/NZD: 1.0525 - 1.0665 ▼