The Canadian dollar appreciated on Thursday after Bank of Canada (BoC) Governor Stephen Poloz spoke at the Canadian Club in Toronto. His speech was titled "The Three Things Keeping Me Awake at Night". Poloz delivers a hawkish assessment of the economy confident that less stimulus will be needed going forward. The economy is in a sweet pot in the economic cycle running close to full output and inflation near the 2 percent target.
The USD/CAD was higher earlier in the session, but the loonie got support from Poloz’s speech by keeping an interest rate hike on the table for the first quarter of 2018. The Bank of Canada (BoC) raised rates twice in 2017 to leave the benchmark rate at 1.00 percent, but as the economy cooled, so did the rhetoric. The words today from the BoC Governor suggest that current rates are still too low, but all monetary decisions will be based on the evolution of the economy.
After the U.S. Federal Reserve hiked the Fed funds rate on Wednesday by 25 basis points, the third lift by the central bank this year, the gap between the Canadian rate and the American rate was expected to grow as the BoC did not appear to be ready to raise. The statement from Mr Poloz makes it clear that the neutral rate for the Canadian central bank is higher, but also that it is no rush to get there and will do so only when the economy justifies it.
The USD/CAD lost 0.47 percent in the last 24 hours. The currency pair is trading at 1.2754 after the words from Bank of Canada (BoC) Governor Stephen Poloz pushed the loonie higher.
Mr Poloz focused on three things keeping him up at night: cyber threats, high house prices and household debt and the tough job market for young people. Housing related concerns are highly relevant given the new mortgage rules to try to keep prices grounded will come into effect on January 1st. Canadian borrowers are stretching themselves by combining mortgages with lines of home equity. Canadian banks have already suffered credit downgrades given their exposure to a fall in prices or higher rates that could make the payments unsustainable for these borrowers and the BoC is right to be monitoring the situation as it related to the path of interest rates in 2018.
NAFTA was a topic Poloz addressed several times during his speech and in the Q&A afterward. The Governor believes that the uncertainty of the trade deal is holding back investment in Canada. As negotiatiors meet in Washington without political interference this intercessional meeting is expected to bring tangible, albeit smaller results. Canada, Mexico and industries that would be affected by the sudden exit (6 months) if the Trump administration decides to terminate its involvement in the agreement, have started to lobby for a change in tactics. The defeat of Republican candidate Roy Moore in the special senate election will weigh on Republicans that side with the part line instead of the people.
Oil prices rose on Thursday. West Texas Intermediate is trading at $57.04 as the disruption in the North Sea pipeline continues to support higher prices. The outage of the Forties pipeline kept prices higher as crude inventories continue to shrink. The Organization of the Petroleum Exporting Countries (OPEC) trade agreement is partly responsible but of concern to traders is the rise in gasoline stocks signalling a lack of demand.
The Energy Information Administration (EIA) released its weekly US crude and gasoline stocks on Wednesday. Oil inventories shrank by 5.1 million barrels, but gasoline grew by 5.7 million barrels. Distillates proved to be the tie breaker as it also fell by 1.4 million barrels. Supply disruptions have kept lack of demand and rising US production in check versus the OPEC and other major producers efforts to reduce their output to stabilize prices.
