More than a few commentators have noted how bizarre it is that the fate of the global DM hawkish lean hangs not on Janet Yellen’s testimony on Capitol Hill Wednesday, but rather with the Bank of Canada, which has launched a concerted effort to telegraph a rate hike over the past several weeks.
As Bloomberg’s Luke Kawa wrote on Tuesday, “a rapid repricing of monetary policy paths has markets seeing a Bank of Canada that’s moved rates nearly just as far away from zero as the Federal Reserve by this time next year.”
“The Bank’s abrupt shift in rhetoric didn’t rock longer-term rates globally, like European Central Bank President Mario Draghi’s remarks did, but Canadian central bankers were at the leading edge of what would become a chorus of global central bankers singing a hawkish hymn at the ECB’s forum in Sintra, Portugal that’s changed the conversation from central bank divergence to convergence,” Kawa goes on to note.
“The concerted effort by BoC officials to influence market expectations is too vocal to be ignored,” Credit Suisse’s Alvise Marino wrote in a note this week, adding that “with almost three hikes priced in over the next 18 months, we think markets will need to see data validation to keep USDCAD under pressure.”
Well, the moment is upon us as and the word from Stephen Poloz is indeed hike.
Here’s the USDCAD reaction:
And some context:
- Canada Raises Rate to 0.75%, Says CPI Softness Is Temporary
BOC: “current outlook warrants today’s withdrawal of some of the monetary policy stimulus in the economy” - Bank of Canada: Recent data bolster confidence in outlook for above-potential growth and the absorption of excess capacity
- Poloz: Output gap projected to close “around the end of 2017”, earlier than anticipated in April Monetary Policy Report
- Future adjustments to overnight rate target “will be guided by incoming data”
Bank expects inflation to return to close to 2% by middle of 2018 - Bank “acknowledges recent softness in inflation but judges this to be temporary”
heightend food price competition, electricity rebates in Ontario, automobile pricing are factors behind soft inflation readings - BOC recognizes “lag between monetary policy actions and future inflation”, deems rate hike “appropriate”
- Bank of Canada: Economy has been robust, fueled by household spending
“significant amount of economic slack has been absorbed”
1Q growth expected to moderate but “remain above potential” - Growth is broadening across industries and regions, “becoming more sustainable”
Adjustment to lower oil prices is ‘largely complete’, goods and services sectors expanding - Bank of Canada: GDP growth will moderate from 2.8% in 2017 to 2.0% in 2018, 1.6% in 2019
GDP growth forecast to be 3.0% annualized in 2Q 2017, 2.0% in 3Q 2017 - Household spending likely to remain solid over next few months but pace expected to slow
- Consumption to add 1.9pp to growth in 2017, from 1.4pp in April MPR
“exports should make an increasing contribution to GDP growth”; business investment should add to growth - Bank: Global economy continues to strengthen and growth is broadening
elevated geopolitical “uncertainty still clouds the global outlook” - BOC removes assumption of ‘fiscal stimulus’ to U.S. growth
- Bank raises rates for first time since 2010
