Bank of Canada Instant Reaction: Governor Poloz Tells It Like It Is

The North American trading session has been quite exciting so far this morning as a variety of events have hit the wires that have immediate as well as long-term impacts on markets. As for the immediate, the usual barrage of pre-Non-Farm Payroll releases were unleashed which helped paint a clearer picture on how NFP may perform, but perhaps the biggest event of the day was the BoC’s decision to leave interest rates steady at 0.75% which, along with their statement, could have the more long-term effects moving forward.

In a speech that he gave last week, BoC Governor Steven Poloz gave a HUGE hint as to how his institution would be operating by saying that “the downside risk insurance from the interest rate cut (in January) buys us some time to see how the economy actually responds.” That line essentially told us that the BoC wouldn’t be cutting rates and that they were likely to stand on the sideline to see the effects of the cut they had already made.

Nonetheless, the pundits whom predict these types of things still expected the BoC to cut another 0.25% up until the end of last week, however, that opinion changed as the new week started. Perhaps clinging to that original assertion, the USD/CAD surged higher over the last 24 hours which has been violently reversed nary an hour post-release.

When digging deeper in to the statement the BoC released, there is plenty of room to be optimistic about the future of Canada as well. While they mention that oil prices are having a deleterious effect on their economy, they make an effort to promote the positive aspects of the global economy and that much of what is happening is “as expected.” In fact, they mention six times (in so many words) that they are not surprised by what is happening around them (highlights my own):

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent.

Total CPI inflation in Canada has fallen as expected, reflecting the significant drop in oil prices. Core inflation remains close to 2 per cent and continues to be temporarily boosted by the pass-through effects of the lower Canadian dollar, as well as sector-specific factors.

The global economy is evolving broadly in line with projections in the Bank’s January Monetary Policy Report (MPR). The United States remains the main source of momentum in the global economy, while headwinds to growth linger in many regions. In this context, a growing number of central banks have taken actions to ease monetary conditions. Crude oil prices are close to the Bank’s MPR assumptions.

Canadian economic growth in the fourth quarter of 2014 was consistent with the Bank’s expectations. The oil price shock had a modest early impact on aggregate demand, and a larger effect on income. The Bank continues to expect that most of the negative impact from lower oil prices will appear in the first half of 2015, although it may be even more front-loaded than projected in January. Nevertheless, data for 2014 as a whole suggest the anticipated rotation into stronger growth in non-energy exports and investment is well underway.

Financial conditions in Canada have eased materially since January, in response to the Bank’s recent monetary policy action and to global financial developments. This easing is reflected across the yield curve and in a wide range of asset prices, including the Canadian dollar. These conditions will mitigate the negative effects of the oil price shock, further boosting growth through stronger non-energy exports and investment.

In light of these developments, the risks around the inflation profile are now more balanced and financial stability risks are evolving as expected in January. At present, we judge that the current degree of monetary policy stimulus is still appropriate and the target for the overnight rate remains at 3/4 per cent.

Due to the confident feeling Poloz and his banking brethren are feeling toward their own expectations of what will happen in the future, the USD/CAD broke lower and could potentially challenge established support below 1.24 which we pointed out in yesterday’s piece. If NFP fails to match up with the extended streak of positive releases it has had, the USD/CAD could be on the verge of a much bigger drop than we have witnessed so far today.