By Michael O’Neil

Is Stephen Poloz really a Jedi-Master?  Is he just be biding his time as Bank of Canada Governor while he awaits the next Sith Lord threat?

The evidence is circumstantial, but if you use your imagination, and maybe some illicit pharmaceuticals, it is there.

Near the end of September, the Canadian dollar was on the verge of breaking key resistance at 83.30 cents (against the US dollar) and expected to climb to 87.00 cents.  Then Mr Poloz gave a speech titled “The Meaning of Data Dependence.”  When he finished, Canadian dollar buyers became Canadian dollar sellers.  The Canadian dollar started a slide that continued unabated until November 1, losing nearly 6 cents during that time.  Did Mr Poloz use the Jedi mind trick to make that happen?

A month later, the BoC monetary policy statement said that inflation would take a little longer to hit the 2% target in 2018, a consequence of earlier Canadian dollar strength and it gave several reasons as to why this was the case.  The statement expressed concern about slack in the labour market and reiterated the four major concerns outlined in the Governor’s September speech.  Those dovish comments were tempered by repeating “less monetary policy stimulus will likely be required over time.”  The forecasts are an example of Jedi Force Vision, the ability to see into the future.

On November 7, at a speech in Montreal, the Governor uttered the Jedi catch-phrase “may the Force be with you”.  Well, not exactly.  His words were” fundamental forces continue to drive inflation as the economy evolves,” per the BoC press release, but close enough.  By the end of the speech, traders concluded that the Bank of Canada might not be as dovish as originally thought.

President Trump has a completely different concept of what “may the Force be with you” means, making him more Jar-Jar Binks than Jedi Master.

The US President is on a five-country tour of Asia, scheduled to attend the Asia-Pacific Economic Cooperation forum on November 10-11 in Vietnam.  The “force” is with the President.  Not the “energy field created by all living things that surrounds us penetrates us and binds the galaxy together” force, but that of the US Navy.  Three aircraft carrier groups are in the region to keep the president safe.

There were not any Jedi tricks in use to increase oil prices, but they climbed anyway.  WTI oil gained 14.2% since October 20, due to supply/demand dynamics and political developments in Saudi Arabia.

WTI oil prices broke above major resistance in the $55.00-$55.10/barrel area at the end of October.  Prices rose steadily because of reports suggesting Opec would extend production cuts beyond the March 2018 expiry of the deal.  Russia President Vladimir Putin reportedly is on board with the idea as is Saudi Crown Prince Mohammed bin Salman.

The Saudi Crown Prince and heir to the throne can personally take credit for 6.3% of the oil price gains.  On November 5, he consolidated his power through mass arrests of potential competitors while seizing their assets.  Just the prospect of political instability in one of the world’s most important oil-producing nations has underpinned crude prices.

That is good news for Canadian dollar bulls, but it is only part of the good news story.  There is a lot more.  The Bank of Canada has merely deferred interest rate increases in the near term.  They fully expect to be raising rates again, soon, based on data.  And the recent data has been good.

Canada New Housing Prices rose 0.2% in September following higher than expected Housing Starts and Building Permits data.  The November 6 Ivey PMI report rose to 63.8 in October from September’s 59.6 level.  That gives more credence to the ongoing economic expansion view.  Canadian employment growth surpassed expectations again.  The Canadian economy created 88,700 full-time jobs in October.

But it’s not all “peaches and cream.” The North America Free Trade Negotiations do not appear to be going all that well for Canada.  The US has been overly aggressive in many of their demands implying a “their way or the highway” tactic.  President Trump wants to tear up the deal and his views appear implicit in the American strategy.  It is difficult to see how the end of NAFTA would be good for the Canadian economy or dollar.

The Bank of Canada says that they haven’t included NAFTA scenarios in their forecasts.

Oil prices are well above $50.00/barrel which is thought to be the break-even price for US shale producers.  If so, a ramp-up in US production will weigh on oil prices.  Lower crude prices will lead to a weaker Canadian dollar.

The Canadian dollar is vulnerable to announced, and yet-to-be-announced changes at the Federal Reserve.   Fed Chair Janet Yellen’s term was not renewed.  She is to be replaced by Jerome Powell at the end of January.  He is thought to be less dovish than her.  There are three other empty slots or four if Janet Yellen decides to leave the board completely.  (Her term as board member doesn’t expire until 2024).  A new, hawkish Federal Open Market Committee would be another Canadian dollar negative.

There is a really good chance that BoC Governor Stephen Poloz is not a Jedi.  That’s because Star Wars: The Last Jedi movie opens on December 15 and his name doesn’t appear anywhere in the credits