- The Bank of Canada is set to leave rates unchanged in June, and investors will examine the bank's tone.
- Any comment by Tiff Macklem's on negative rates may rock the loonie.
- The new Governor's approach to QE is also high on the agenda.
Has the previous crisis prepared Tiff Macklem for the job? The new Governor of the Bank of Canada is assuming the position in the middle of the coronavirus crisis after deputizing for Mark Carney around the financial crisis.
Outgoing chief Stephen Poloz already took the needed emergency measures at the peak of the financial turbulence in March – and set interest rates at a minimum of 0.25%, something that is unlikely to change. Nevertheless, Macklem may still have a considerable impact on the loonie – from the get-go.
Here are three things to watch out for in the new boss' first decision:
1) Rosy glasses still on?
Poloz seemed almost always cheerful, seeing the glass half full, and he continued with this line until the very end – saying that the economic situation will not be as dire as many think. Does Macklem share this view? An ongoing upbeat outlook may boost the loonie, while pessimism would send it down.
At the time of writing, COVID-19 claimed over 7,000 lives and infected more than 90,000 in Canada. Looking at mortalities per million, The nation fared better than Germany, Italy, Spain, the UK, and the US at the outset, but Canada's curve refused to decline in recent weeks, and it is now on the rise. Per million, the situation is only better than the UK in this comparison.
Source: Financial Times
Macklem may express concern about the current health state.
The Canadian economy shrank by 8.2% annualized in the first quarter, better than expectations and the eurozone but worse than America, its largest trading partner.
While the two North-American economies are closely linked, Canada is more dependent on oil prices, which suffered severely already early in the year. However, crude has been recovering, and that Q1 figure may be skewed to the downside. The new Governor has room for optimism on this front.
Worse contraction than in the financial crisis
The labor market is reeling, with Canada's unemployment rate soaring to 13% after losing nearly two million jobs in April. That may fall as government plans kick in to keep people at work and support those who have lost their jobs. How does Macklem see the balance between the sudden crash and the hopes for a recovery? That is unknown.
2) Negative rates
All over the world, currencies have been moving amid speculation for sub-zero borrowing costs. The US dollar fell when the Federal Reserve categorically denied it, while the pound dropped after officials at the Bank of England seemed to warm up to the idea.
At his presentation as the new Governor, Macklem said it is one of the tools available to the Ottawa-based institution, weighing on the C$. When the dust settled, it emerged that he mentioned it as a possibility, but not one that he prefers.
Will the BOC's statement include a mention of setting negative rates? The most likely scenario is that it is omitted. Macklem does not face the press at this juncture, so it would be easier to avoid the topic altogether. However, if sub-zero rates make their way into the official release, the Canadian dollar could tumble.
Rates never went below zero in Canada.
3) More QE
Contrary to their neighbors down south, the BOC is somewhat shy of bond-buying. The Quantitative Easing (QE) scheme it introduced in March consisted of C$!10 billion of corporate bonds and C$50 billion of provincial ones.
If Macklem remains open to more bond-buying, it would be positive for the Canadian dollar. While money printing is seen as a devaluation, it could support government relief and stimulus, boosting the economy.
If he hints at a significant and imminent boost to such schemes, that could already tip the balance against the loonie. It would also show that the BOC, under new management, is alarmed.
Conclusion
Traders will carefully watch every word in Tiff Macklem's first decision as BOC governor. Comments on the current economic situation, negative rates, and QE are all critical for the Canadian dollar.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended Content
Editors’ Picks
EUR/USD drops below 1.0800 after German Retail Sales data
EUR/USD has come under fresh selling pressure and trades below 1.0800 after the data from Germany showed that Retail Sales declined by 1.9% MoM in February. Resurgent US Dollar demand is adding to the downside in the pair. US data are next in focus.
GBP/USD stays weak near 1.2600 amid market caution
GBP/USD remains defensive near 1.2600 in European trading on Thursday. The hawkish tone from Fed Governor Christopher Waller keeps the US Dollar afloat amid a cautious trading environment ahead of key US data releases and the Good Friday trading lull.
Gold price holds strength ahead of US core PCE inflation
Gold price holds onto gains near $2,200 in Thursday’s European session. The precious metal exhibits firm footing ahead of the United States core PCE Price Index data for February, which will be published on Friday.
XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC
XRP programmatic sales ruling by Judge Torres was completely rejected by another US Court that ruled in favor of the SEC in a lawsuit against Coinbase.
Portfolio rebalancing and reflation trades emerge into Q2
Yesterday’s price action pointed at a possible end-of-quarter portfolio rebalancing as the session saw the laggards of the quarter like Apple and Tesla gain, and the stars like Microsoft and Nvidia retreat.