January 22, 2015

Bank of Canada move hits commodity currencies

The Bank of Canada is the latest Central Bank to deliver a shock; cutting its main policy rate to 0.75% from 1.0% in a move which none of the 22 analysts surveyed had anticipated.

The Bank of Canada is the latest Central Bank to deliver a shock; cutting its main policy rate to 0.75% from 1.0% in a move which none of the 22 analysts surveyed had anticipated. Saying that the collapse in oil prices will slow inflation and weigh on the economy, BoC Governor Poloz said the bank “has room to manoeuvre should its forecast prove to be either too pessimistic or too optimistic”. USD/CAD rose to a 6 year high of 1.2394.

In Europe, as the big day finally arrives, it is hopes for QE which are clearly the driver of equity outperformance; certainly not the current economic conjecture or the immediate outlook for corporate earnings. A series of well-crafted leaks over the past few weeks has framed a narrative where first the amount was discussed, then the practical methodology and thirdly the timeframe. So, we heard of a EUR500bn sovereign bond programme, then that it might be the responsibility of national Central Banks and overnight that it could be a fixed monthly purchase facility mirroring that of the Federal Reserve. Our colleague Gavin Friend in London has written a more detailed note on the various possibilities.

To sum up briefly, the biggest bang for the buck (or the euro) will come if the programme is big, quick and driven by the ECB. Size matters. To get to get the balance sheet up to 2012 levels would imply buying assets worth EUR1trln in total, comprising around EUR100-200bn of Covered Bonds and ABS, EUR300-400bn of TLTRO lending and the remainder by sovereign and or corporate bond buying. EUR500-600bn should be an absolute minimum. Time is of the essence too. The sooner the programme starts, the quicker its impact can be felt. Delaying until March serves no practical purpose whatsoever. Finally, the identity of the purchaser matters; not just to underpin the very notion of burden-sharing in a Monetary Union should it be the ECB, but to avoid suspicions of Teutonic foot-dragging should responsibility be devolved to the national level. There is far more to this evening’s announcement than the total amount of bonds to be bought.

For markets, we will not see the same volatility which the Swiss caused a week ago (famous last words!), but trading on three, four, or even five different big figures for EUR/USD is entirely possible. And, given extreme levels of positioning as revealed both anecdotally and in IMM data, we prefer to watch this from the sidelines. We’ve exited our short position established at USD1.2435 at 1.1555. A bird in the hand is worth two in the bush.

With the three Commonwealth currencies firmly at the bottom of the overnight pile in the wake of the Bank of Canada’s surprise 25bp rate cut, the Australian curve is now pricing a 40% probability of a rate cut on Feb 3rd from 18% yesterday. For AUD/USD, price action around the cycle low of 0.8033 – should we get there – could be hugely important.

Coming up today/ tonight

Locally, Australia’s November New Home Sales (which rose 3.0% m/m in October) are the only numbers of any note for the rest of this week whilst in New Zealand, ANZ Consumer confidence numbers for January are released.

The US housing market stays in the news for the next couple of days. Today brings the FHFA house price index which is expected to rise 0.3% m/m in November after October’s +0.6% increase, whilst on Friday the market expects a 2.4% m/m increase in existing home sales to an annual pace of 5.05m.

US weekly jobless claims – released at exactly the same time that ECB President Draghi starts his Press Conference – should reverse the recent increase and may well print once gain below 300k.

After the ECB meeting, investors eyeing the global Central Bank calendar will see the FOMC on January 28th, the RBNZ on the 29th and the first RBA meeting of the year on February 3rd.


AUD lower; Canadians cut rates: Eurostoxx 600 +0.6%, Dax +0.4%, CAC +0.9%, FTSE +1.6%. Dow +19 points to 17,534, +0.1%, S&P 500 +0.1%, Nasdaq +0.4%, VIX 19.51 -1.9%. Shanghai +4.7%, Mumbai +4.7%, Nikkei 225 +0.2% and ASX 200 +0.4%; ASX SPI futures this morning +0.6%. US bond yields: 2s at 0.50% (0), 10s at 1.84% (+5). WTI oil at $47.72 (+2.7%), Brent at $48.99 (+2.1%), Malaysian Tapis (yesterday) $47.92 (-2.8%). Gold at $1294.10/oz (-0.0%). Base metals: LME copper +1.4%, nickel +1.7%, aluminium +1.2%. Iron ore $67.8/t -0.5% Chinese steel rebar futures -0.3%. Soft commodities spot futures: wheat +0.0%, sugar +0.6%, cotton +0.4%, coffee -1.9%. Euro Dec 14 CO2 emissions at €7.41/t (2.2%). The AUD/USD is 0.8094 now

UK Unemployment (Nov qtr) 5.8% (L: 6.0%; E: 5.9); jobless claims change (Dec) -29.7K (L: -29.6K; E: -25K)

US Housing starts (Dec) 1089K/4.4% (L: 1043K/-4.5%; E: 1040K/+1.2%)

Bank of Canada unexpectedly cut rates 25 bps to 0.75%

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