The Poloz Plan, AUD Employment & Debate
Central bankers walk a fine line where a surprise can often stimulate an economy but a shock might destabilize it. Reading between the lines, the Bank of Canada seems to be setting something up for the near future. The Australian dollar was the top performer Wednesday while the pound lagged. The Fed's Dudley and Australian employment are due next. A new Premium trade shall be issued ahead of tonight's Presidential Debate between Clinton & Trump.
As we expected, the BOC didn't downgrade its forecasts as much as feared or offer an outright dovish tilt in the statement. That sent USD/CAD a cent lower to 1.3000. The surprise came later when Poloz said they “actively discussed” more stimulus. It led to a reversal in USD/CAD and eventually to a session high 1.3137 as oil climbed on another tighter inventory report.
The strategy for the BOC is to hint that a hike could be on the table without making any promises. One of the lessons of the past couple years of central bank decisions is that doing exactly what you've promised can backfire. When central bankers clearly foreshadow a hike, the market expects it then prices in even more. The result is for markets to end up unimpressed.
A surprise, on the other hand, can help to trigger the animal spirits and grab headlines. The risk is that markets are overly surprised and worry the central bank sees yet-undetected problems or that the central bank appears sloppy and loses credibility.
Poloz walked that line in the past and delivered a surprise rate cut in 2015 that helped to stimulate the economy, weaken the currency and he managed future expectations by calling the move 'insurance' against future trouble.
In all likelihood, he's setting up something similar for early 2016. The BOC is clearly not in neutral mode but it judged that market pricing of only a 14% chance of a cut in January was closer to 'shock' than 'surprise' so he offered the hint about an active discussion on cutting.
The risk is that he's shown his hand because the market has seen it before and markets will now begin to aggressively price in a hike and drive USD/CAD higher. What might make that difficult is that oil is trading at the highest since July 2015.
What could give the US dollar a tailwind is the Fed. Dudley is on the agenda at 2345 GMT and could offer hints on a December rate hike. However, the topic of the speech is NYC economic history so it's equally likely to be a dud.
One thing on the agenda that's sure to move markets is the Australian employment report for September at 0030 GMT. The consensus is for a +15K rise but watch the full/part-time breakdown. Technically, AUD/USD broke and closed above the key 0.7700 level Wednesday. That's the highest close since April although several intraday peaks in the interim were higher, with the highest at 0.7756. That's a level to watch through the data.
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