Central Bank Matchup: BOC vs. RBNZ

Greetings, forex friends, told y’all to to watch out for this week’s central bank events! Now that the BOC and RBNZ have announced their respective decisions, it’s time to take a look closer to find out why their respective currencies moved as they did.

The Bank of Canada (BOC)

  • Overnight rate maintained at 0.50% as expected
  • BOC’s GDP growth expectations remain unchanged at 1.5% for 2016
  • BOC expects CPI to temporarily dip in the near future
  • BOC still expects headline CPI to move back to 2.0% by 2017
  • BOC not too worried about the Loonie’s recent rise
  • BOC will take planned fiscal measures into account

As expected, the BOC decided to maintain the policy rate at 0.50%. According the official statement, the following are the reasons why the BOC decided to keep rates on hold:

  • “The global economy is progressing largely as the Bank anticipated in its January Monetary Policy Report (MPR).”
  • “Financial market volatility, reflecting heightened concerns about economic momentum, appears to be abating.”
  • “Prices of oil and other commodities have rebounded in recent weeks.”
  • “Canada’s GDP growth in the fourth quarter was not as weak as expected, but the near-term outlook for the economy remains broadly the same as in January.”
  • “All things considered, the risks to the profile for inflation are roughly balanced.”

Overall, the BOC sounded pretty upbeat, which likely caused forex traders to speculate heavily that the BOC won’t be cutting rates anytime soon. In terms of specifics, the BOC still expects that the global economy will trend higher starting this year. In addition, the BOC still projects that Canada’s economy will grow by about 1.50% in 2016 and 2.50% in 2017.

Regarding the details of Canada’s economy, the BOC noted that business sentiment “remains very weak,” but highlighted that non-energy exports are beginning to pick up, which is a very good sign that the Canadian economy is moving away from its dependence on the resource sector. The BOC also noted that household spending remains robust and that “National employment has held up despite job losses in resource-intensive regions.”

Speaking of employment, Canada will be releasing it’s jobs report tomorrow, so make sure to check out my Forex Preview since tomorrow’s jobs report may accelerate (or halt) the Loonie’s intraweek rally.

Moving on, the BOC warned that “The factors that pushed total CPI inflation up to 2 per cent will likely unwind in the months ahead.” The “factors” that the BOC is talking about are the Loonie’s past declines during the previous months, which made imports more expensive. The BOC is therefore warning that inflation will temporarily dip in the near future. But BOC officials also forecasted this in their January Monetary Policy Report, saying that headline inflation will be back at 2.0% by early 2017 once the Loonie’s past declines have passed through the system.

Regarding the Loonie, the BOC refrained from jawboning it, and only said that Loonie’s rise and higher oil prices “have averaged close to levels assumed in the January MPR.” In short, the Loonie’s rise is within the BOC’s expectations, so there’s no problem. And forex traders probably took that as another reason start loading up on the Loonie.

Aside from the BOC’s rather upbeat outlook and lack of jawboning on the Loonie, the BOC also touched upon plans to include an “assessment the impact of the upcoming federal budget’s fiscal measures” in the BOC’s next projections.

And if y’all managed to read up on my earlier write-up titled 3 Things You Need to Know About the Loonie’s Forex Price Action, I noted then that the Canadian Imperial Bank of Commerce (CIBC) stated in its Monthly FX Outlook that:

“The use of deficit spending by the Liberal government to stimulate the economy means that the pressure on the currency from potential monetary easing has been significantly reduced. Indeed, according to a technical report by the Bank of Canada, $10 bn worth of fiscal stimulus has more of an effect on GDP than a reduction of 100bps in the overnight rate.”

In other words, another reason why the BOC is unlikely to cut rates again any time soon and another likely reason why forex traders bought up the Loonie.

USD/CAD 15-minute Forex Chart

USD/CAD 15-minute Forex Chart

The Reserve Bank of New Zealand (RBNZ)

  • Official cash rate slashed to 2.25% vs. steady at 2.50% expected
  • Kiwi is too strong, “a decline would be appropriate”
  • RBNZ downgrades projected Q1 2016 annual inflation from 1.2% to 0.4%
  • RBNZ downgrades projected Q4 2016 annual inflation from 1.6% to 1.1%
  • Monetary policy will continue to be accommodative
  • Further policy easing may be required

While BOC officials were rather optimistic, RBNZ officials were a downright pessimistic bunch, so much so that they decided to cut the official cash rate by 25 bps to 2.25%. Incidentally, that caught most forex traders and analysts by surprise. Heck, only two of of 17 economists surveyed by Bloomberg expected a rate cut.

With regard to inflation, the rate cut was actually preemptive since the RBNZ stated that “there has been a material decline in a range of inflation expectations measures,” which the RBNZ fears will become self-fulfilling, according to RBNZ Governor Graeme Wheeler’s official press release. But the RBNZ didi justify the rate cut as a means to “support continued expansion in the New Zealand economy.”

The RBNZ’s March Monetary Policy Statement provides more details. According to the Statement, the RBNZ projects that global activity will continue to be subdued. With regard to New Zealand’s trade partners, the RBNZ expects them to only grow by 3.4% per year in the next three years, which is a lower than their earlier expectations, as presented in the December Monetary Policy Statement. In addition, global inflation is “soft and lower than projected in December,” which spills over into New Zealand as well.

Weak global demand is also taking a toll on New Zealand’s economy, especially the dairy industry, but this is partially being offset by the booming tourism industry.  And while net immigration is at “an extremely high level,” it didn’t translate to a pick up in domestic inflation. The influx of immigrants is expected to pump up demand for housing, however, so house price inflation is expected to pick up down the road.

Overall, the RBNZ still expects inflation to rise in 2016, albeit at a slower pace, and the economy is still expected to grow moderately. However, forex traders were more focused on the surprise rate cut and the RBNZ’s threat to ease further “should recent declines in measures of inflation expectations continue, or should we see signs that the perceived target is shifting below 2 percent.” It also didn’t help that Governor Graeme Wheeler didn’t miss the opportunity to jawbone the Kiwi.

NZD/USD 15-minute Forex Chart

NZD/USD 15-minute Forex Chart