The Bank of Canada put a screeching halt to interest rate hikes Wednesday after two quick hikes in succession. The Canadian dollar was the top performer on the day while the pound surged to lead the way. The ECB decision is up next.
It has been a bizarre year for the Bank of Canada, who is quickly earning a reputation for doing the right thing… only after all the other options are exhausted. Through most of the first half of the year, the BOC was stubbornly dovish, hinting at rate hikes and keep rates low despite months of very strong economic data. Then, days before the July decision, deputy governor Wilkins dropped a hint about a hike.
Despite a weak CPI report afterwards, the BOC surprised markets with a hike. The Bank then hit the mute button and didn't have a single statement or interview until the September meeting when they caught markets largely by surprise with another hike.
Back-to-back hikes are unheard of in the post-crisis era and the message from those actions was that policymakers were worried about inflation. Poloz tried to emphasize data dependence and that cooled expectations for a hike Wednesday but still left the markets expecting something hawkish.
Instead, the BOC delivered a dovish hike saying the Governing Council will be “cautious in making future adjustments”. They cited NAFTA, mortgage rules changes and the Canadian dollar as reasons. None of that will be cleared up by year-end so a 50/50 chance of Dec hike is closer to zero and that's why USD/CAD jumped above 1.28.
At the same time GBP/CAD jumped more than 300 pips as it was also fueled by strong UK GDP numbers and the expectation that Carney will hike UK rates next week. Technically, that pair exploded above the Aug/Sept highs to a test of 1.70. It will likely rise to 1.75 if Carney delivers a hike with a hint of hawkishness.
Before that, the ECB is on deck. Expectations are centered around a taper to 30 billion euros per month of QE from 60 billion starting in December. Many market watchers are also talking about an extension in buying until September but it's highly unlikely that the ECB gives that much clarity. Draghi loves to add a measure of uncertainty and flexibility. Locking himself in with a timeline would be out of character.
The market could interpret the flexibility as dovish and send the euro lower. In addition, the large net-long EUR position could be waiting to 'sell the fact' on a taper announcement. A 3rd euro trade in the Premium Insights will be added ahead of the ECB.