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Financial Markets weekly newsletter

Posted on: January 20, 2017

The stats sheet

  • 3 mos CDOR – .954 bps
  • 2 year GOC bonds - 0.76%
  • 5 year GOC bonds - 1.13%
  • 10 year GOC bonds –1.75%
  • 3 mos US libor - .9703
  • 5 yr Treasuries - 1.9755%
  • 10 yr Treasuries - 2.49%
  • USD/CAD – 1.3360
  • EUR/CAD – 1.4235
  • CAD/JPY - 86.22
  • GBP/CAD – 1.6433

Canadian News

Context is everything isn’t it? Gov. Poloz did indeed say that an interest rate cut “remains on the table” at the press conference following the MPR this week. But he said it in response to a question about the possible protectionist trade policies of a Trump administration.

The BOC had suggested in the MPR that such policies could have “material consequences” for Canada and that the process of globalization could “go in to reverse.” As an identified downside risk to their outlook, a rate cut would likely be triggered. Doesn’t mean its going to happen. Isn’t even an easing bias. Just good central banking-(and in fairness, the market hasn’t priced anything in). But, undeniably, the cup is half full right now at the BOC. They have upgraded global, US and Canadian growth for 2017 and 2018 and they feel resource-related industries are bottoming out, but they also talked of “material excess capacity” in the economy and stressed that the labour market slack in Canada had increased y-o-y. So not a good story.

Another point of note–the BOC has introduced a new methodology for measuring the impact on non-energy exports (NCX) of the value of the Canadian dollar – reflecting the new paradigm and the spurred on by the muted increase in NCX despite the 30% drop in the loonie. (More on this in a standalone piece from us to come).

What does it all mean?

  • BOC still feels we face challenges in creating jobs and reaching capacity
  • It’s worried about the Trump Presidency (not an exclusive club) on trade
  • It’s perplexed by the lack of pass through from loonie weakness to exports

So what to do? Be comfortable with a weaker currency and try to buy some time for continued recovery and discovery. With this in mind, I’d say the press conference represented mission accomplished.

US News

Rates are going up. Regular readers will know we have been banging on that pot for a while now. Chair Yellen spoke this week and highlighted how the Fed is close two achieving targets on its two major mandates – employment and inflation. She said there will be a “few” hikes. To this author, this has appeared (not unreasonably) the Fed view for some time. They have done the heavy lifting. They have done their job. Time to normalize rates. We have 80% probability of 3 hikes this year priced in. It’s hard to argue.

Currency News

The dollar has oscillated on Trump comments this week – but the US is the currency in which to denominate investments these days (and everybody else is engaged in a race to the bottom) so weakness is likely to be short-lived. As the chart above shows, the Canadian Dollar could be poised to feel the effects of general dollar buying and loonie-specific weakness. A powerful one-two punch to a currently glass-jawed fighter.

We at Financial Markets remain, as ever, All In.

Mark Johnson
Director, Financial Markets-Interest Rate Sales
403-974-3582 mjohnson4@atb.com

 
 

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