Walking Dead is an AMC television series about a world over-run by zombies and how a group of survivors adapt to the challenges.
Walking Dread, the Bank of Canada story, is about the Canadian economy that is greatly outperforming expectations and the Bank Governor who is terrified of the uncertainties he sees.
Both are scary.
The quarterly Bank of Canada (BoC) Monetary Policy Report (MPR) was released on April 12. If you were looking for reasons to be positive about the Canadian economic outlook, it had plenty of them.
The BoC upgraded its forecast for global economic growth from to 3.3 percent from 3.2 percent, in 2017. More importantly, they predicted that Canadian GDP growth would rise to 2.6 percent in 2017, a big jump from the 2.1 percent that they predicted in January.
First quarter 2017 GDP growth has been revised upwards from 2.5 percent in January to 3.8 percent.
The Bank estimates that the output gap is will close early in 2018, rather than around the mid-point of 2018
And, most important of all, BoC Governor Stephen Poloz did not say anything about “rate cuts being on the table”.
By admitting that rate cuts weren’t on the table, Mr. Poloz automatically upgraded the monetary policy statement. The January and March statements were doveish. The April statement is cautiously ‘neutral’.
Those looking for negatives in the MPR wouldn’t have to dig very deeply.
The BoC admits “it is too early to conclude that the economy is on a sustainable growth path.” They said the recent GDP growth has been largely due to growth in investment spending in the oil and gas sector. Non-commodity business investment spending growth was weak as were non-commodity exports.
The Bank is concerned with heightened levels of uncertainty about US tax and trade policies and unsure about how to incorporate them into their forecasts.
The Bank is also unsure about how much excess capacity the domestic economy really has.
Nevertheless, even if the BoC is uncertain about the outlook for interest rates and the domestic economy, market analysts don’t see it that way.
The upgraded economic forecasts and the omission of “rate cuts on the table” chatter have forecaster penciling in a rate hike in the first quarter of 2018.
The interest rate statement and the MPR caught USDCAD traders off guard. Many expected that Mr. Poloz wouldn’t say anything that could be construed as Canadian dollar positive, leaving the Loonie vulnerable to added losses.
That didn’t happen. Instead, the Canadian dollar rallied and in the process opened the door to further gains toward the 2017 peak of $0.77 cents.
The prospect of a sharply higher Canadian dollar was enhanced on April 12. According to the Wall Street Journal, President Trump said the “US dollar is getting too strong.”
Those comments come at a time when speculative short Canadian dollar positions are quite large. The triggering of stop losses would exaggerate a Canadian dollar rally.
The Canadian dollar is also deriving benefit from firm oil prices and anticipation that Opec extends production cuts beyond the end of June.
West Texas Intermediate (WTI) has recouped all its March losses and is trading comfortably above $50.00/barrel. If prices stay above $46.50/b, the uptrend from April 2016 is intact.
The Federal Reserve has also played a role in Canadian dollar strength. Fed Chair Janet Yellen is still extremely cautious about interest rate hikes. Furthermore, the ongoing discussions about how to shrink the balance sheet may serve to limit US rate increases in the short term.
For Canadian dollar bulls, it gets even better. President Trump’s trade rhetoric with China has been toned down and that bodes well for Canada.
FX traders are forward-looking beasts and like instant gratification. They tend to drive currencies to levels where they think they should be, in anticipation of an expected event or events occurring.
The Bank of Canada, is pessimistic by design. It needs to be. Its principal role is to “to promote the economic and financial welfare of Canada.” That means they need to have a good understanding about the risks to their forecasts and the domestic economy.
Failure to do so would mean that instead of Mr. Poloz “walking dread,” from a financial perspective, Canadian’s would be the “Walking Dead”