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Financial Markets weekly newsletter

Posted on: March 06, 2017

The stats sheet

  • 3 mos CDOR – .938 bps
  • 2 year GOC bonds - 0.76%
  • 5 year GOC bonds - 1.16%
  • 10 year GOC bonds –1.71%
  • 3 mos US libor - 1.10
  • 5 yr Treasuries - 2.02%
  • 10 yr Treasuries - 2.50%
  • USD/CAD – 1.3412
  • EUR/CAD – 1.4200
  • CAD/JPY - 85.00
  • GBP/CAD – 1.6420

Canadian News

“Two roads diverged in a wood, and I— I took the one less traveled by, And that has made all the difference” - Robert Frost

I don’t how much Frost knew about monetary policy–but he certainly caught the current mood of the BOC. Despite GDP beating expectations at 2% Y-O-Y (with sizeable revisions higher to last month) – which is higher than US GDP y-o-y by the way- the BOC is looking enviously south of the border at an economy that is predictable. Unemployment is low, inflation ticking up, and confidence high in the US. Here in Canada –well let’s just admit it – we are deeper and more nuanced. Our economy appears to be suffering from excessive capacity. Sure it’s ok, but it should be better in the circumstances, hence little inflation pressure and no wage pressures with 6.8% unemployment. This used to be close to considered full employment, but one suspects that rate is as much as 1% lower these days.

So – the BOC is making it clear- they are diverging from the Fed. And historically, this has been the path less travelled as Canadian policy has been largely a facsimile of US. But the BOC feel this is different. Their concerns are not currently the same- and they want everyone to know that. We have seen loonie weakness and the yield curve steepen, as shorter maturities reflect “lower-for-longer”, with those further out more focused on the bigger picture – good fundamentals and a stallion US economy just a few miles south.

US News

The rhetoric from the Fed was plentiful and strong last week.

New York President Dudley – “the risks to the outlook are now tilted to the upside”

San Fransisco President Williams – “a rate hike will receive serious consideration”

Fed Governor Brainard –“it will likely be appropriate soon to remove additional accomodation”

And then there were the well reported remarks by Chair Yellen on Friday to ice the cake.

Please keep in mind how the Fed works on speeches. They arent the BOC – officials don’t speak with one voice pre-agreed for continuity – officials are free to express their individual and personal views on developments and policy when they speak. And these 4 individuals are quite divergent from each other in their broad view on appropriate rates. Yet they all concede – given everything we know – rates must be adjusted higher. As we wrote just last week, “they are inappropriately low, and the base position should be to raise, with evidence framed as “why shouldn’t we?” and not “why should we?” The Fed are hiking and they want you to get used to that fact. The market has heard them. We have 96% of a March hike priced in, with 93% believing rates will be at least 50bps points higher by year end.

Currency News

The US dollar continues to exhbit strength overall. It had a good week and regained everything it had lost over the past 2-3 weeks. Against most majors it is trading near key resistance and another move higher should see it push on to the highs we saw at the end of 2016. The loonie has been one of the most hurt this week, reflecting further evidence of diverging monetary policy, a stalling in oil prices and Canada’s insistence that the NAFTA negotiations are trilateral.

Finally – check out the chart to the left – this is the VIX – the volatility index. It looks like there is pent up demand that sees no follow through. What’s the issue? Sick of buying the protection outright, the market is now buying Calls on the VIX instead – basically buying insurance against a major risk event. These options are 43% more expensive than their long term average. One thing is clear; “I’m afraid I don’t know, but I know I’m afraid”.

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

Mark Johnson
Director, Financial Markets-Interest Rate Sales


Most Recent Market Updates

November 20, 2017

Natural gas gains 4.4 cents

NYMEX natural gas climbed 4.4 cents higher on Friday.

November 20, 2017

Crude gained $1.41

Crude prompt futures gained $1.41 on Friday to close the day at $56.55.

November 17, 2017

Natural gas falls 2.7 cents

NYMEX natural gas continued it’s decent on Thursday.

November 17, 2017

Crude prices slide $0.19

Crude prompt futures traded in a 69 cent range.

November 17, 2017

USDCAD range bound as Canadian CPI uneventful

Domestically we saw the biggest release of the week a few minutes ago.

November 14, 2017

Natural gas loses 5 cents

Cold weather emerged over the long weekend in the US Midwest to East as anticipated.


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