The Bank of Canada (BoC) joins Norges Bank in setting itself apart from other G10 central banks by validating market expectations for earlier tightening. The BoC announced a taper of its government-bond purchases, adjusting its pace of weekly purchases to CAD3 bn from CAD4 bn. This is best characterized as less dovish rather than outright hawkish and was not a surprise.
Bringing forward the closing of the output gap to the second half of 2022 from 2023 after upgrading its 2021 GDP growth forecast by 1.5pp to 6.5% is, however, a hawkish signal that is driving CAD outperformance.
Moreover, the BoC did not push back against CAD strength beyond an observation that the rally commensurate with commodity prices.
G10 central banks have spent much of the past year justifying loose monetary policy by emphasizing downside risks to activity. This emphasis made central banks more predictable. More recently, the focus has shifted to accepting a pick-up activity but downplaying expected higher inflation as transitory. This communication tactic also makes monetary policy more predictable and is contributing to lower cross-asset volatility. More diverse opinions within and between central banks could act as a corollary to drive vol higher.
Loose financial conditions are critical. In the Fed’s case, financial conditions are as loose as October 2018, and in turn, close to the very accommodative backdrop last seen in February 2007. The Fed has so far dismissed any suggestion that risk-taking in the economy or financial markets is a concern for financial stability. For the BoC, a red-hot housing market could be the source of a more hawkish monetary policy, with the policy statement noting that while “house price increases are rooted in fundamentals, we see some signs of extrapolative expectations and speculative behaviour.” Central banks were unified in combatting the covid crisis with ultra-loose monetary policy.
Pulling out of the crisis is a different story and should prove a major source of financial-market vol. Strongly rebounding post-vaccine economies and signs of speculative behaviour by households will provide hawks with ample ammunition to bring forward tightening expectations.
Without getting ahead of ourselves, though, Thursday’s ECB meeting should not provide a hawkish surprise. Although EURUSD has rallied following 5 of the last 8 ECB meetings, averaging a 0.58% gain after 5 hours, this should be a taking-stock meeting after the Governing Council (GC) announced on March 11 PEPP purchases in Q2 would be made at a “significantly higher pace”. President Lagarde should fall short of the BoC’s upbeat assessment despite Germany ramping up its vaccine programme. She will be keen to stress that the GC will not withdraw the stimulus prematurely.
Softer oil is holding rates in check favourable of gold
Gold continues to trade well, breaking the highs from earlier this week. Momentum buying took gold close to $1800 even as the market absorbed decent selling. Banks were better sellers while retail and macro names were good buyers. With the CTA showing 6 short, 2 long and 4 neutral, I expect more shorts to exit after the break of $1790/$1800. The short-term technical outlook for XAUUSD is bullish, taking guidance from the recent i) completion of a double bottom (bullish pattern) and ii) increased upward momentum. Completion of a double bottom suggests a move to $1800, followed by $1833. Vols are a touch higher with spot testing the topside.
Published by Stephen Innes Global Chief Market Strategist AXI