BoC Does It Again

The Bank of Canada hikes interest rates on Wednesday and left the door open for more. The Canadian dollar soared and was easily the top performer while the New Zealand dollar and yen lagged. Australian retail sales are up next. A new Premium  trades in major index has been issued alongside 3 supporting charts and notes.

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The Bank of Canada is all about the output gap and proved it once again Thursday. Stronger growth numbers were inputed to the model after Q2 GDP data and the machine spit out an earlier close, which means sooner rate hikes and that led to a hike.

What the model may be missing is that a narrow or closed theoretical gap in potential growth isn't leading to inflation anywhere, especially not wage inflation. Poloz and company maybe overlooking the disinflationary impacts of a higher currency and lower commodity prices; never mind the risks to Canadian housing.

In any case, the BOC wields the power and USD/CAD bulls were crushed. The pair fell to 1.2143 from 1.2405 immediately after the announcement before a bounce to 1.2220 late. It's a fresh two-year low in the pair. It kept the door open for more hikes (without committing) and said the focus will be on the labor market and household debt. We will look for more clarification in upcoming BoC speeches.

Otherwise Thursday, the US dollar was bounced around. It sold off after Fed Vice-Chair Fischer announced his resignation. He was a hawkish voice at the core of the FOMC. The dollar bounced back later after a bipartisan deal to lift the debt ceiling and fund the government through Dec 15, when the fight will renew again.

The next items on the agenda are from Australia with retail sales and trade balance for July due at 0130 GMT. Will the RBA be the next to make a hawkish shift?