CAD Soars: Thank Bank of Canada for the Confusion

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With no major economic data released in Asia, Europe or North America, currencies are taking their cue from equities. All of the major European indices are down more than 1% and Dow futures have fallen sharply, pointing to a significantly lower open this morning. The only possible explanation for the risk aversion is snap U.S. Presidential Polls declaring Obama the winner of 2 out of 3 debates and Democrats are seen to be less pro-business than Republicans. However earnings have also been weak and the possibility of further losses could be weighing on sentiment as well.

The big focus this morning is the Canadian dollar, which soared after the Bank of Canada’s monetary policy announcement. BoC Governor Carney completely psyched investors out (ourselves included) by warning last week that growth forecasts would be revised lower. While they did lower growth forecasts for 2014, they also RAISED their growth forecast for 2012 and kept their 2013 forecasts unchanged. A lot can change in 2 years time and investors are only focused on the immediate 1 to 12 month outlook, which the Bank of Canada upgraded slightly which shows that Canadian policymakers aren’t nearly as concerned about the economic outlook as they led everyone to believe.

Furthermore, the central bank continued to say that “some modest withdrawal of monetary stimulus will likely be required” because they believe that businesses and consumers will lead moderate growth in Canada, helping it reach capacity by the end of 2013. Considering that retail sales growth slowed in August, these comments suggest they anticipate consumer spending to rebound in the coming months. Before the BoC rate decision, we learned that consumer spending rose 0.3% in the month of August, down from 0.7% in July. Excluding autos demand was slightly stronger, growing 0.4%. The details of the report show that consumers spent more on gasoline and less on discretionary items such as clothes and shoes. This data shows that despite a sharp increase in employment, stronger job growth has not translated into stronger spending in Canada. Nonetheless, it did not stop the BoC from holding onto their hawkish monetary policy stance. They also expect core prices to return to their target of 2% by the middle of next year.

Action speaks louder than words and the BoC’s surprise decision to maintain their hawkish monetary policy suggests that aren’t too worried about the Canadian dollar being worth more than the U.S dollar, even though they say they are. With today’s announcement, the BoC is still the only major G7 central bank thinking about raising rates and this should renew the rally in the Canadian dollar.

Kathy Lien
Managing Director

2 thoughts on “CAD Soars: Thank Bank of Canada for the Confusion”

  1. Disagree. Respectfully.
    I dont think Canada rates will be going up anytime soon. The market has overreacted to this statement, and misinterpreted.
    A chance to buy the UsdCad dip, but lets see momentum slow and reverse first. But, I could be wrong, even spectacularly so.

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