The Canadian dollar was lower on Wednesday after the Bank of Canada (BoC ) Governor delivered a speech in Newfoundland. Governor Stephen Poloz said that there is no predetermined path for interest rate and that the central bank would proceed with caution. The rhetoric was less hawkish that his comments in June and July. Unknowns are making estimating the appropriate rate path hard, but then again that has been the situation in all of 2017. The loonie has been one of the best performers this year after the two rate hikes, but has lost momentum after the Fed has signalled a third rate hike of the Fed funds rate. The comments from the BoC indicate a slower rate path that could see the central bank standing pat for the remainder of the year.
The Canadian economy is the fastest growing out of the Group of Seven which explained the quick turnabout from the central bank regarding rates. In June senior policymakers started dropping heavy hints about an upcoming rate hike, which materialized in July. The BoC was quiet ahead of September and with the market estimating a rate move in October it was caught by surprise by the rate hike announcement. Economists criticized the central bank for their lack of communication. The Canadian rate stands at 1.00 percent the same as in 2015 before Governor Poloz made two proactive cuts ahead of a steep fall in oil prices.
NAFTA negotiations are one of the unknowns that was not called out by name by Poloz on Wednesday. While the US and Mexico want a speedy resolution ahead of elections in both nations it is Canada who has been hit by intimidation tactics. The first one was the lumber tariffs imposed earlier in the year and now it is Canadian company Bombardier that will have to pay 220 percent duty on its CSeries planes. The move was also condemned by UK Prime Minister Theresa May and is threatening with retaliation. Bombardier employs 4,000 in Northern Ireland and given the importance of the Democratic Unionists in forming a Conservative government after the fiasco of the snap election results.
The USD/CAD lost 0.021 in the last 24 hours. The currency pair is trading at 1.2374 ahead of the US President Donald Trump speech outlining his tax reform. The USD failed to capitalize on a hawkish speech by Fed Chair Janet Yellen yesterday putting a December rate hike for the US benchmark firmly on the table. Yellen issued a warning that waiting for inflation to pick up could be a big mistake. The Canadian dollar appreciated earlier in September when the Bank of Canada (BoC) surprised markets with a 25 basis points rate hike. The Canadian central bank governor
The central bank was quiet ahead of announcing the monetary policy decision in stark contrast with the July meeting when it gave the market a clear heads up on its intentions. The market was expecting the 25 basis points rate hike to come in October, but the BoC thought it best to do it sooner rather than later with no warning. Poloz’s speech will be filled with the bank’s assessment of the economy that prompted the BoC to make that decision.
Later in the week the monthly GDP figures will be announced which could validate Mr Poloz’s eagerness to hike. A slowdown in growth could also raise question marks about his decision given that as expected the European Central Bank (ECB) and the U.S. Federal Reserve did not touch their benchmark rates. The Fed did finally announce the details of its balance sheet reduction program. December will be once again host the most important meetings of the year for most central banks. The Fed could hike a third time, but it all depends on the economic performance in the third quarter.
US oil rose 0.923 on Wednesday. The price of West Texas Intermediate is trading at $51.72 after the Energy Information Administration (EIA) released the weekly inventory numbers. Crude stocks printed a surprise drawdown of 1.8 million barrels. This is the first decline in four weeks for crude inventories and a strong signal that refineries in the US are back online. Gasoline stocks climbed 1.1 million barrels also beating expectations of a 100,000 barrel drawdown. US refiners are running at a 88.6 percent capacity.
Energy analysts are hopeful of strong demand for energy in the coming years, but so far only supply disruptions have made energy prices rise. The hurricanes in the US and the ongoing situation in Northern Iraq will keep prices higher until they are sorted. The US energy sector seems to have shaken off the impact of the two hurricanes and is well on its way to full capacity ahead of the winter season. The geopolitics in Iraq will bring volatility to crude as global supply could be affected by the Kurdish region wishing to form its own state. The Iraqi central government and allies like Turkey have already warned about the retaliatory measures they will take on the result of the referendum. Turkey has said that it would cut off the pipeline carrying Kurdish oil to make if they do not desist.