The dollar continues to reign supreme and nothing is seemingly getting in its path, not even the Bank of Canada.
Following what can only be described as a tidal wave of support from central banks in the last 24 hours, predominantly via liquidity injections, the Bank of Canada took the brave decision to add to its prior repo rate announcement by dramatically cutting rates by 50bp in an unscheduled announcement.
The US dollar is now heading for its best week since 2008, as measured by the Bloomberg dollar index, with investors seeking safety in liquid markets.
US Treasury yields are rising in the front-end, cross-currency swap premiums are rising, and developed market currencies are selling off in the greenbacks wake.
Some thoughts on the BoC announcement:
- Today’s unprecedented move by the BoC highlights the detrimental risks posed towards the Canadian economy, especially after what can only be described as an underwhelming start to fiscal support this week. With central banks globally showing its all hands to the pumps, especially over the last 24 hours with increased liquidity provisions, the barrage of risks likely forcing the Canadian economy into a recession meant that Poloz had to take a more proactive approach. It is unlikely that the BoC will start weighing up more unconventional monetary policy measures in the short-run given their space for further conventional rate cuts, but today’s announcement shows concerns over the housing bubble have flipped as growth conditions threaten to expose highly leverage households.
- The Bank of Canada’s main risk is arguably now growth rather than house prices. Previously, rising household debt-to-GDP metrics niggled in the back of the Governing Council’s mind, refraining them from raising rates too aggressively. It was a lesser problem back then, now it is a concern. A tanking economy brings these financial vulnerabilities to the fore, which in turn threaten to exacerbate the initial economic impact. The Bank of Canada’s decision to cut rates today in this light now becomes more transparent – it is more about ensuring confidence in the housing sector and in the consumer.
- Comments from Finance Minister Morneau reiterated the stance taken earlier in the week by Deputy Prime Minister Freeland – “whatever it takes”. This is exactly what markets want to hear and shows a close knit relationship between the government and central bank in what is a set to be a continued “coordinated” stimulus package. Following the announcement of fiscal measures earlier this week amounting to the tune of C$1.1bn, and comments from both Morneau and Freeland, we now expect further fiscal stimulus measures to plug the void between now and Governor Poloz’s last scheduled meeting as the head of the central bank in April.
- The loonie’s nonchalant reaction highlights how nothing is rational in markets in the classical sense. The US dollar continues to reign supreme, while DM currencies subject to fresh stimulus measures today are the only ones sat in the green (i.e. NOK, AUD and to a much lesser extent CAD). Interest rate differentials now play no part in the determination of currency pricing, not just in the G10. High-yielding currencies fail to find support in the current environment despite their relatively more attractive carry as volatility tears through sentiment. For now, the loonie will continue to find itself in a precarious situation as the risks to a more entrenched recession mount and the monetary war chest empties.
Over to you Mr Trudeau….
Graph: Loonie unfazed as surprise central bank stimulus becomes the norm, despite the currency sitting at lows not seen since 2016
Author: Simon Harvey, FX Market Analyst at Monex Canada.