Is it time for Bank of Canada Gov. Stephen Poloz step aside and make room for Prime Minister Justin Trudeau and his infrastructure spending? Click here to find out why some experts…
The yellow line is the % of over over (under) valuation of the Canadian Dollar based on producer purchasing power parity. This metric indicates that the Canadian Dollar is the most undervalued at any time in the last three years, except for a brief time during the crisis.
There is widespread anticipation that the Bank of Canada’s statement this week will carry a more dovish tone than the previous statement in December. Some believe that it could even carry an explicit reference to a future rate cut. We do not agree with the consensus. First, as we discuss below, not enough has changed since December to necessarily justify action. Second, both quantitative and anecdotal evidence suggests that the market is already heavily positioned for a more dovish tone and therefore the risks are to the upside for the Loonie coming out of this announcement. That is, unless we get a fairly significant and explicit change in tone, Canadian Dollar shorts are likely to be disappointed.
The key parts of the Bank’s statement from December are shown below in Italics, followed by our commentary.
The global economy is expanding at a modest rate, as the Bank expected. Although growth in several emerging markets has continued to ease, growth in the United States during the third quarter of 2013 was stronger than forecast. Even if some of this pickup was due to temporary factors, the data are consistent with the …
Where do the analysts expect the Canadian Dollar to be at the end of the first quarter? The yellow line is consensus forecast at near 1.070. The white line is the current price at 1.095. The options market implied probabilities are the curved bell line. The green bars are the distribution of analyst forecasts.
In light of the “taper debate” culminating in this afternoon’s FOMC statement, as well as signs of disinflation everywhere, we thought this might be a useful time to review Janet Yellen’s views on the topic. Here she is speaking on the topic, in an admittedly different environment, in 2009. Note the focus on the risks of inflation below 2%.
Back on September 5th of this year, we examined the relationship between futures market positions on the Canadian Dollar and the value of the loonie. At the time we argued for a short term recovery in the Canadian Dollar based on the divergence of that general correlation. Sure enough, the loonie recovered over the next several days and the correlation was restored. In light of the most recent move down by the Canadian Dollar, we thought it would make sense to reexamine the relationship. As shown below, this particular metric seems to suggest that the loonie is in for a short term recovery.
The white line is the net number of long vs short futures contracts outstanding on the Canadian Dollar. The orange line is the value of the Canadian Dollar.