Sat, Oct 16, 2021 @ 12:07 GMT
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The Great Monetary Turn Begins

The pandemic led to the most-aggressive deployment of monetary policy in history but its success means it’s already time for withdrawal, something that will begin with the Bank of Canada on Wednesday. The loonie lagged Tuesday ahead of the decision while the yen led the way as risk aversion struck. Canadian CPI came in under expectations, lifting USDCAD to new session highs of 1.2650s. The crucial BoC decision is next. Watch the 100-DMA in USDCAD @ 1.2670.

In just over one year, the Bank of Canada has accumulated more than 40% of government bonds outstanding. Even for a challenge like covid-19, the pace of bond buying has been too fast. In November, Macklem made the first move to slow purchases but combined it with a duration extension and successfully finessed it as a technical move.

In Wednesday’s decision there is likely to be a true taper to $3B/week from $4B. Such a shift isn’t entirely expected and they could wait a bit longer but the central bank has backed itself into a corner. Macklem said that owning more than 50% of outstanding bonds could affect market functioning and even a taper to $3B will put them over that limit in months.

A shift is also entirely justified by the fundamentals. New forecasts for GDP growth this year are likely to be boosted to 6% from 4% even with the latest lockdowns. On top of that commodity prices are high, the reopening timeline is moving forward, this week’s Federal budget is stimulative, home prices are sizzling, global growth has been resilient and US stimulus will spillover.

In spite of all that, the consensus view is that Macklem will try to engineer a ‘dovish taper’ by jawboning on the loonie or moving the goalposts on the output gap to by pledging an inflation overshoot.

Both those things may happen but actions speak louder than words and a taper puts the BOC on the path to tightening.

USD/CAD hit 1.26 in a retracement this week on broader risk aversion but there’s plenty to like about the loonie once markets settle.

The BOC decision is at 1400 GMT with a press conference an hour later. Also note that Canadian CPI will be released at 1230 GMT and with headline and two-thirds of the core measures expected above 2%, risks are towards something that could make the BOC think about earlier tightening.

 

Ashraf Laidihttp://ashraflaidi.com/
Ashraf Laidi is an independent strategist and trader, founder of Intermarket Strategy Ltd and author of "Currency Trading & Intermarket Analysis". He is the former chief global strategist at City Index / FX Solutions, where he focused on foreign exchange and global macro developments pertaining to central bank policies, sovereign debt and intermarket dynamics. Ashraf had also served as Chief Strategist at CMC Markets, where he headed a global team of analysts and led seminars and trainings in four continents. His insights on currencies and commodities won him several #1 rankings with FXWeek and Reuters. Prior to CMC Markets, Laidi monitored the performance of a multi-FX portfolio at the United Nations, assessed sovereign and project investment risk with Hagler Bailly and the World Bank, and analyzed emerging market bonds at Reuters. Laidi also created the first 24-hour currency web site for traders and researchers alike on the eve of the creation of the euro. Laidi's analysis of currency markets stand out based on his distinct style in bridging the fundamental and technical aspects of the markets. Laidi regularly appears on CNBC TV (US, Europe, Arabia and Asia/Pacific), Bloomberg TV (US, Asia/Pacific, France and Spain), BNN, PBSs Nightly Business Report, and BBC. His insights also appear in the Financial Times, the Wall Street Journal and Barrons. He has given numerous interviews and lectures in Arabic, French, and to audiences spanning from Canada, Central America and Asia/Pacific.

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