By Dean Popplewell
It’s a pivotal week for the loonie, starting with today’s retail sales data release for September and the BoC monetary policy rate announcement half an hour later. Tomorrow we have the MPR report. Last week’s weaker-than-expected September CPI release coupled with the dovish comments from Governor Carney has the loonie under-performing outright and against the crosses. The FI market is even pricing in a cautious rate and MPR statement. Later this morning, many expect Carney to change the bank’s current “eventual” stance to neutral. Tomorrow, do not be surprised to see growth forecasts modestly revised for this and next year.
Pricing models have the BoC remaining on hold at 9am EST (+1%). More doubt surrounds the tone of the statement, given the absence of hawkish elements in comments released by Governor Carney last week. The BoC has maintained a hawkish guidance throughout recent months, but market expectations have shifted toward a shift in rhetoric today. Many pundits expect to see at least a partial rollback in the message. Carney will probably tone down the hawkish tone due mainly to the recent slowdown in business investment outlook and the appreciation of the CAD.
Data has been mixed since the last meeting, CPI has been weaker than expected, while manufacturing data has continued to perform well and the correction in housing data is taking place at a slower-than-expected pace. Over the past five trading sessions the market has happened to get itself short the loonie and so far has enjoyed a profitable ride. A number of other reasons have also aided the negative currency move. Risk aversion has been weighing on all commodity and interest rate sensitive currencies; copper has plummeted to a six-week low, while WTI oil trades at $88pb vs. Friday’s $93.05 high. The Harper government blocking the foreign Petronas oil deal has also added to the loony’s recent discount worries. Now we can expect many to pare some of these long USD profitable positions ahead of the official announcement.
Governor Carney turned less hawkish last week, announcing that tomorrow's MPR will update the bank’s growth and inflation outlook to take into account the impact of global uncertainty on the Canadian economy. In his view, global uncertainty is having a “dampening effect on demand for Canadian exports and on domestic firms’ investment, hiring, and sales prospects.” With policy makers placing more of an emphasis on the “internal and external headwinds,” it has been widely perceived as bullish for rates. This has allowed the front end of the Canadian yield curve to rally, causing curve steepening as dealer’s expectations of rate hikes moved further out the curve.
What has really changed to cause this hawkishness? Since the last go-around, Canadian hard data has not been too far out of line. It cannot be the “U.S. Fiscal Cliff” as Carney expects it to be avoided. It was, as many analysts have been touting, business investment survey data. BoC policy makers expect “solid” business investment and consumption to drive growth in Canada. Carney also believes that the “persistent strength of the Canadian dollar has been one of the reasons why monetary policy has been exceptionally accommodative for so long.” After the last meeting and since QE3 in the U.S., the loonie took flight-It is a good enough reason for the Bank to clip the loonie's wings!
With a “confirmation” of a more neutral stance from the Governor can we anticipate further unwinding of CAD long positions? Despite the immediate risk on parity for USD/CAD, confirmation may carry little weight as many have been adjusting. Real money and specifically ACB’s are expected to fade dollar rallies and especially parity first time around. Many are using upticks as an opportunity to set short dollar trades. Even day trend indicators are threatening to “peak in overbought territory.” A parity one-touch option is expected to roll off tomorrow, just above the 200DMA (0.9999). The problem with setting up this trading strategy is that many others have the same idea!