Markets Range Bound and Quiet with US Holiday
- Quiet Data Calendar and Thin Liquidity Likely to Lead to Quiet Session
- What's Next for the BOC?
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Quiet Data Calendar and Thin Liquidity Likely to Lead to Quiet Session
Most of our counterparts in the US are settling in for a day of turkey and football this morning as opposed to picking winners and losers in currency markets. As such, liquidity will be at a premium both today and tomorrow in FX markets with most US traders away from their desks. This, combined with the fact that we won't see the release of any financial markets data of any real consequence over the next two days, should mean that we'll be witness to a couple of rather uninspiring sessions to close the week. Global risk appetite has roared back over the last 24 hours however as the fever pitch around the situation in Ireland has become somewhat more subdued as the ongoing political wrangling plays out before the world. In addition, cooler heads on the Korean peninsula appear to be winning out and the market's worst fears of a more intense conflict between North and South Korea appear to be abating somewhat now as well, further strengthening the market's more risk accepting tone.
Though markets are stable this morning, risk was in vogue during the North American session yesterday and Asian session last night. Equities performed well with the Nikkei, Hang Seng and Shanghai Composite gaining 0.5%, 0.1% and 1.3% respectively. The CAC, DAX and FTSE in Europe are all in the black as move towards the close and the US dollar has continued to be on the defensive. Though most of the dollar's losses did in fact come during yesterday's session ahead of the holiday, it was somewhat surprising to see that we didn't experience a net inflow of USD with traders consolidating positions ahead of the holiday long weekend. Rather than experiencing the normal consolidative bounce, the dollar has remained week and currencies have by and large held onto their gains and in some rare cases even extended them further. Crude oil is continuing to trade with the $84 handle that it achieved yesterday on the rally in risk while gold is holding at $1372.
What's Next for the BOC?
Tuesday's most recent Canadian inflation readings were a real eye opener for both the market and policy makers, as price pressures have roared back to the fore after being somewhat non-existent for the better part of the past two years. While the market has largely assumed that inflation would remain mired near the bottom of the Bank's stated 1 to 3% target range, the fact that aggregate price growth has moved back near 2% has everyone talking about how Mark Carney, Governor of the Bank of Canada, is likely to respond. When market participants talk, they also change their collective expectations and this situation is no different as interest rates are already beginning to creep higher in expectation of a move from the BOC. While we had previously believed that the Bank would be on hold through Q2 of next year while the Fed is printing Benjamins to support its quantitative easing program scheduled to conclude in June, it now appears likely that Mr. Carney will have to move on rates earlier, and perhaps more aggressively, in order to maintain medium-term price expectations within the Bank's targeted band.
As the market now begins to adjust its Canadian interest rate expectations higher, the Loonie will certainly benefit as investors seeking yield will in no doubt place a larger portion of their international holdings in Canada. It is also important to keep in mind that this likely increase in CAD rates on a relative basis will also have a positive impact on USDCAD forward points, further extending the benefit that sellers of USD and buyers of Canada receive in the forward market. This widening of the relative interest rate differential will also spur buyers of Canada to add to their speculative and hedge positions, putting more weight behind the Loonie's push back to par. Barring further near term contagion with respect to the European sovereign debt issue, it would be reasonable to expect USDCAD to take yet another run at the triple bottom in place at 0.9980 in relatively short order.
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