Bulls gotta take a break, too! The pound and the Loonie pulled back from their recent rallies when BOE head honcho Carney and BOC policymaker Lane gave their testimonies during the start of what would likely be a monetary policy-focused week.
- BOE Governor Carney: Case for tightening reinforced by rising global rates
- Carney: “Monetary policy has to move in order to stand still.”
- Carney: Future hikes are likely to be gradual and limited
- BOC policymaker Lane: Rates are still relatively low to what they think is neutral level
- Lane: Watching CAD closely and taking its strengthening into account
- Lane: Consumer debt is a vulnerability to the financial system
- Canadian foreign securities purchases up from -0.86B CAD to +23.95B CAD
- U.S. NAHB housing market index fell from 67 to 64 vs. 67 forecast
BOE Guv’nah Carney’s speech
Pound pairs were already jittery in the hours leading up to BOE head Carney’s testimony as market participants were probably expecting him to temper the currency’s strong rally. He didn’t really say anything downbeat but traders did pick up on a bit of shakiness in his hawkish stance as he stated:
“The case for a modest monetary tightening is reinforced by the possibility that global rates may be rising, meaning that monetary policy has to move in order to stand still.”
In other words, one of the main reasons for keeping the door open for a BOE rate hike is that most of their peers are doing it and that they don’t want to get left behind. This was particularly disappointing for pound bulls who were under the impression that the tightening bias was mostly due to strong U.K. fundamentals.
Carney explained that the globalization of the financial system has led to spillover effects in inflation and monetary policy, more so for advanced economies. He mentioned the Fed’s plan to gradually reduce its holdings of U.S. Treasuries a.k.a. the much-anticipated balance sheet runoff, citing that adjustments to their own policy should be made as their analysis suggests that the U.K. will absorb roughly two-thirds of the global impact.
As for Brexit, Carney mentioned that lower immigration and de-integration could likely be inflationary for the economy as this might provide short-term upside pressure on wages. This also supports the idea of further tightening even after Brexit but pound traders seem to have snoozed off when Carney started talking about the Philipps Curve. If you’re up for it, check out the full text (and graphs!) right here.
BOC policymaker Lane highlights CAD strength
BOC officials may be glass half-full when it comes to their outlook for the Canadian economy, but it looks like they want to rein in some of the Loonie’s gains. According to policymaker Timothy Lane, they are watching the Canadian dollar’s appreciation and that they would take this into account in their next decisions.Apart from that, the rest of his speech was still pretty upbeat as he highlighted how Canada has seen favorable data over the past weeks and that Q2 GDP was rather strong. He even mentioned that current rates are still low relative to what they deem are neutral levels.
Lane did warn that household indebtedness could also be a cause for concern as this poses a big vulnerability to the country’s financial sector. He figured that this was likely a result of the housing market’s strong performance and how Canadians wanted to get a piece of the pie with their property investments, hinting that this could also be brought up during their next policy meetings.
Major Market Mover(s):
The pound carried on with its slump from the previous trading session as bulls didn’t seem so impressed by Carney’s rationale for hiking rates.
GBP/USD is down 98 pips to 1.3495 (-0.73%), GBP/CHF fell from 1.3028 to 1.2981 (-0.50%), GBP/AUD is down to 1.6943 (-0.22%), and GBP/JPY dipped to a low of 150.15 (-0.12%)
The Loonie was also in the losers’ bench for the day as Lane’s jawboning spooked the bulls into thinking that the BOC might not be rushing towards another hike.
USD/CAD is up from 1.2193 to 1.2298 (+0.89%), EUR/CAD is testing the resistance at 1.4700 (+0.93%), NZD/CAD is up 41 pips to .8929 (+0.46%), and AUD/CAD is up to .9793 (+0.36%)
Rounding up the folks in the red is the Japanese yen which gave up ground on improving risk sentiment and pricing in ahead of the BOJ decision.
USD/JPY is up to 111.50 (+0.61%), EUR/JPY rose 86 pips to 133.27 (+0.65%), CHF/JPY is closing in the 116.00 handle (+0.34%), and NZD/JPY is up to 80.95 (+0.17%)
Watch Out For:
- 11:00 pm GMT: New Zealand Westpac consumer sentiment (113.4 previous)
- 2:30 am GMT: RBA meeting minutes (Check out Forex Gump’s preview!)
- 2:30 am GMT: Australia HPI q/q (1.3% expected, 2.2% previous)