MPC Hawks Turn Dovish – Is Canada Next?

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Market Drivers January 21, 2015

BOE minutes reveal a retreat by the hawks as inflation craters
Kuroda hesitates on providing targets for 2% goal
Nikkei -0.49% Europe -0.30%
Oil $46/bbl
Gold $1299/oz.

Europe and Asia:
GBP Claimant count -29K vs. -24K
GBP Average Earnings 1.7%

North America:
USD Building Permits 8:30
CAD BOC 10:00

The release of the BOE minutes surprised the market revealing that the two hawks on the MPC beat a hasty retreat on the issue of rate hikes with the full committee returning to a 9-0 vote to keep rates steady for the time being. Both Martin Weale and Ian McCafferty reversed their votes in light of sharp drop in the inflation data and slowdown in Uk economic activity.

One of the key concerns for the policy makers was that lower oil prices may become entrenched and keep inflation well below the BoE’s 2% target for longer than initially anticipated. More importantly there appears to be no upward pressure from wages in UK. Today’s labor data showed that while claimant count continued to improve dropping another -28K average earnings rose 1.7% as expected.

UK monetary authorities fear that lower prices at the pump may not necessarily translate into higher demand but rather into further deflationary pressure in which case any tightening would be highly counter productive.

The net result of today’s news was a tumble for the pound which dropped all the way to 1.5070 in the aftermath of the release. The chance of any BOE rate hike before Q4 of this year are slim to none, and the markets are beginning to appreciate that fact by pressing cable lower. Still the pair has enjoyed strong support ahead of the 1.5000 level and unless traders become convinced that the Fed will hike rates sooner than Q4, cable may stabilize at these levels for the time being.

In North America today the US calendar is light but the Canadian calendar carries a very important meeting from BOC. Since the last meeting oil prices have fallen another 22 dollars per barrel and the oil patch is facing layoffs. Therefore traders will watch the statement very carefully, both for any signs of lowering of inflation targets and more importantly for any signals that the BOC may be open to further rate cuts.

If the BOC statement does hint at further easing then USD/CAD can easily soar to 1.2200. The pair has been in massive uptrend as oil prices have eased and today’s BOC meeting could be the nail in the coffin for loonie with USD/CAD ultimately eyeing 1.2500 if the market becomes convinced that rates are going lower

Boris Schlossberg
Managing Director

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