- Yellen remains vague and ambiguous
- Rate divergence dominates currency values
- BoC keeping options open
- Riksbank looks to deliver another body blow
Keeping tabs on Central Bank thinking helps investor to understand the demand, or lack there of, for a particular currency. Yesterday, the Fed’s Ms. Yellen gave away very little during her Humphrey Hawkins testimony. Both the ‘hawk’s and ‘doves’ came away with few scraps to feed on. The Fed chair managed to be extremely “vague and ambiguous,” enough to keep markets guessing on when U.S policy makers will move and what the move will be. To date, the Fed rate bar remains at the “lower for longer” even while a June lift-off remains on the cards. It’s no wonder that global markets lack some direction in early trade as dealers continue to assess comments from Yellen.
Other Central Bankers, who happen to be on the periphery, when they speak, can provide some decent market movement. A good example of this over the past 24-hours is Sweden’s Riksbank and Canada’s BoC. Investors are always looking for clues that could lead to further rate divergence, outright versus the USD or directly with the EUR. Today’s major currency wins have had more to do with correctly anticipating rate divergence policies. The Fed, who is supposedly on the verge of rate normalization, has investors favoring the dollar while the rest of the world continues to grapple with low inflation and deflationary worries. However, despite the obvious, it’s the timing of when to own and not to own these trades that provide investors with biggest of rewards.
Poloz sounds “dovish” but will he cut again?
Like Yellen, Governor Poloz from the BoC did not provide a clear signal about whether the Bank of Canada will again lower interest rates at next week’s policy meeting during his speech yesterday. He emphasized that last months -25bps (on the back of plummeting energy prices) cut buys time to see how the Canadian economy responds.
The majority assumed it was a slam-dunk that the BoC would be easing again on March 4; however, the possibility of a potential pause has thrown an extra spanner into the Canada’s bear tool kit. Poloz reiterated that collapsing oil prices are a “net negative” and a setback for a Canadian economy trying to get back to full capacity and full employment. The Governor said that lower oil prices have increased risks to inflation and financial stability. The cut last month was aimed at taking out “some insurance” against these risks. Being proactive gives the governor confidence that the Canadian economy will return to capacity by the end of next year. Last months rate cut to +0.75% was the first since 2009.
The CAD has managed to aggressively rally even since Poloz spoke yesterday as the market focuses on January’s rate cut having brought some time. The obvious shift in sentiment has been fuelled by the “less dovish” than expected BoC. This has led the market to feeling more comfortable re-pricing expectations of another rate cut next week. Prior to yesterday, dealers had priced an 80% of another cut on March 4. Now the majority seems to be “on hold.”
The loonie sits atop $1.2450 with a small corporate bias better buyer of USD on dips. Given the overall bullish outlook for the USD, do not be surprised to see more selling of EUR/CAD (€1.4113) and buying of CAD/JPY (¥95.57) as being more attractive than selling USD/CAD outright to position for a CAD recovery. For the techies, the medium term USD/CAD remains bullish as long as $1.2215 remains intact. Yes, it’s a distance, but not far in a crisis.
Riksbank to “sucker punch” investors
In today’s new age, investors do not have the risk appetite to take on Central Bankers. This is evident in EUR/CHF, where traders are going along with the SNB, and the retreat of EUR/DKK after threatened capital controls. Central Bankers are certainly focusing intently on their own currencies, almost a covert currency war and Sweden’s Riksbank is no different.
Swedish policy makers seem fixated on EUR/SEK (€9.4748). Their currency trades just below the low seen on the day the CB announced its most recent dramatic policy changes (February 12). Minutes from the Riksbank’s latest policy meeting this morning confirms concerns about inflation being too low and that the board members “will do whatever it takes to get inflation expectations up rapidly.” Earlier this month, policy makers cut interest rates to -0.1% from zero and launched QE (SEK10b). The market is now beginning to price in a further rate cut to -0.2% for April and an extension of the bond buying program to quarterly. Their argument only gets stronger if the SEK strengthens further or oil prices continue to drop.
It’s not a forgone conclusion that the Riksbank will be aggressive, but investors should be mindful of the Central Banks wishes. No Central Banker in this environment will let its own currency get too far ahead of itself in either direction!