Central Banks of Canada and England to Hold as Fed Ponders Hike

US Employment Proves Inconclusive to Fed Rate Hike Timing

The USD dollar ended the week higher against major currencies after a week of volatility that showed the struggles of the global economy to grow at a faster pace. Canadian and U.K. data was mixed and will influence both central banks as they announce their monetary policy changes. There are no changes expected from either central bank as Canadian fundamentals have improved putting less pressure on a new interest rate cut. The British economy on the other hand has slowed down forcing the Bank of England to push back its interest rate hike timing.

With the Labor day holiday in the United States and Canada market liquidity will be lower and will ramp up as both markets are back online on Tuesday. The middle of the week will bring the most market action as central banks take the spotlight.

Monday, September 7
9:30pm AUD NAB Business Confidence
Tuesday, September 8
Tentative CNY Trade Balance
Wednesday, September 9
4:30am GBP Manufacturing Production m/m
8:30am CAD Building Permits m/m
10:00am CAD BOC Rate Statement
5:00pm NZD Official Cash Rate
9:30pm AUD Employment Change
Thursday, September 10
7:00am GBP MPC Official Bank Rate Votes
7:00am GBP Official Bank Rate
8:30am USD Unemployment Claims
Friday, September 11
8:30am USD PPI m/m
10:00am USD Prelim UoM Consumer Sentiment

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

BOC Expected to Hold After Proactive Cuts Validated by Economic Data

Trade balance, employment and a slight touch of recession showed Bank of Canada make the right call with its monetary policy this year

The week of August 31 to September 4 gave the market a plethora of Canadian economic indicators to guide traders. From the politically charged gross domestic product data earlier in the week to the employment data and purchasing managers index (PMI) on Friday. The Canadian economy gave strong arguments about the Bank of Canada (BOC) strategy working to boost growth. The two BOC interest rate cuts appear to have stimulated exports and improved Canada’s GDP, but ultimately not enough to avoid a technical recession.

BOC Governor Stephen Poloz is expected to hold rates on Wednesday, September 9 at 10:00 am EDT. The Canadian benchmark rate stands at 0.50 percent and with the uncertainty of a Federal Reserve interest rate hike it would be prudent for Mr. Poloz to wait until the American central bank moves first.

Canadian Economy Falls into Technical Recession
The market widely anticipated Canada to fall into a technical recession after the final monthly data point of the second quarter was added to the quarterly tally. While the Canadian economy did fall into a recession, two consecutive quarters of negative growth, June’s 0.5 percent growth managed to make it a moderate recession with a 0.5 contraction. The fact that Canada managed to grow above expectations as the price of oil continued to be pressured downwards by a supply glut gives the economy a strong chance to return to growth in the next quarter.

Trade Deficit Shrinks in July
Canadian trade balance data published on Thursday, September 3 showed the deficit narrow to $593 million in July. Economists had forecasted a $1.3 billion trade deficit for the same month. The weaker loonie and a more resilient U.S. economy were the main drivers. The Bank of Canada (BOC) can take some of the credit as their proactive monetary policy decisions have been timely, in particular if taking into consideration the Fed’s patience regarding an interest rate hike.

Strong Employment Defies Low Oil Price and Recession
Released at the same time as the more closely followed U.S. NFP, Canada published its own employment change data. The Canadian economy added 12,000 jobs when the forecast called for a loss of 4,800. More Canadians have entered the workforce which pushed the unemployment rate to 7 percent from the previous 6.8 percent. While the news of a recession made more headlines given the impact it can have on the upcoming elections, Canadian employment is also validating the decision by Governor Stephen Poloz to cut rates twice in 2015 to give exports a competitive advantage offsetting the losses in the energy sector.

BOE to Hold as Weaker PMIs Threaten Growth

Construction, manufacturing and service PMIs came below expectations urging BOE to Wait on Rate Hike

Bank of England (BOE) Governor Mark Carney was one of the biggest names attending the annual Jackson Hole central bank symposium. The BOE is expected to hold rates as the U.K. economy has lost some of the momentum that had it at one point as the top choice to be the first major central bank to hike interest rates. The speed of growth slowed down in the Fall of 2014 which was only compounded by a bad quarter in the U.S. which set the global recovery back. Carney said that turmoil out of China would not affect its interest rate plans. Those plans are expect to yield an interest rate hike in the first quarter of 2016.

The economic data of the United Kingdom was mostly negative as the purchasing managers index (PMI)s for manufacturing, construction and services all missed expectations. Out of the three the construction PMI was the only one able to improve the previous month’s reading. Manufacturing and services took a step back that eases off the pressure on the Bank of England to cut rates as the economy is not firing in all cylinders.

The U.K. benchmark interest rate is 0.50 percent and is expected to remain unchanged. The minutes of the monetary policy committee (MPC) meeting will be published immediately after the official bank rate announcement. This is a fairly innovate practice that bring the Old Lady inline with the actual speed of markets and transparency. The last vote was expected to show more support for a rate hike, but there was only 1 vote against keeping the rate on hold. The expectation was that at least two policy members would vote against, with the possibility three would join the rate hike bandwagon. After increased global market volatility it is unlikely the number of dissenters would grow, but investors will be looking at the vote count for hints of a future rate hike.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza