Former Senior Deputy Governor (2010-2014) Tiff Macklem has been announced as Governor Stephen Poloz’s successor, effective June 3rd.
The appointment of Macklem blindsided spectators somewhat as his bid went under the radar with current Senior Deputy Governor Carolyn Wilkins and former BoC member, who is currently a Blackrock employee, Jean Boivin pipped as front-runners. When Boivin dropped out of the race to continue at Blackrock some weeks ago, markets took the appointment of Wilkins as a foregone conclusion, but history tells us not to second guess the Bank of Canada when it comes to appointing a new governor.
Currency markets were initially unfazed by the announcement as the Bank is considered to be greater than just its governor – something Poloz was keen to highlight at his last MPC announcement.
Additionally, Macklem’s experience post-financial crisis under Carney means the bank is being left in secure hands at such a fragile time. This is pivotal as the BoC is expected to navigate the exit of crisis-era policies and avoid situations similar to the taper tantrums seen over the last decade when balance sheets began to compress. However, the subdued market reaction wasn’t to last. The curveball question of negative rates was thrown the way of the incoming governor who then highlighted that they remained in the Governing Council’s toolkit. While Macklem stated that he was comfortable with the lower bound of the BoC’s policy rate at 0.25%, something Governor Poloz called the “effective lower bound”, he agreed with the departing governor that rates could, in theory, continue to fall into negative territory. However, the response to the question was a lot blunter than what markets have become accustomed to under Governor Poloz, resulting in the Canadian dollar taking another leg lower as the weekend approaches.
In our opinion, given the current macro climate and conditions in oil markets, the loonie was trading heavy into the weekend prior to the press conference.
This was evident in yesterday’s session where the Canadian dollar failed to jump onto broad US dollar weakness and ended up sustaining losses, along with JPY, after the 4pm fix. With the currency overvalued by our estimates, it was natural for currency traders to listen out for reasons to sell the loonie in today’s announcement, especially given the shock in the appointment. In this light, the adjustment in USDCAD back into the $1.40 region was justified in the current climate.
Author: Simon Harvey, FX Market Analyst