Poloz Leaves Canadian Dollar Reeling as Hopes of Another Rate Hike Dissipate

Both Canadian and New Zealand central banks threw curveballs at their currencies over Wednesday and Thursday leading to a shakeup of market expectations for monetary policy

The Canadian and New Zealand Dollars are under pressure against the G10 basket in London Thursday after both respective central banks left bullish speculators holding an empty bag.

Traders had been pricing a shift by the Bank of Canada back onto a more hawkish footing while the Reserve Bank of New Zealand was expected stay mum amid a changeover of the guard inside the central bank as well as in NZ politics.

What transpired instead was seen as an almost dovish speech from Bank of Canada governor Stephen Poloz while the RBNZ threw its own curveball at the Kiwi Dollar.

“The BoC is not happy with the rise in the currency and with supply growth likely to restrain inflation, the mere suggestion that they could be done tightening for the year was enough to send USD/CAD above 1.2450,” says Kathy Lien, managing director of foreign exchange strategy at BK Asset Management.

In a speech titled “The Meaning of Data Dependence: An Economic Progress Report” Stephen Poloz emphasised the need for the BoC to pay close attention the changes in the currency and incoming data, given the Canadian central bank has now raised rates twice twice within a three month period.

“The head of the Bank of Canada said there is no predetermined path for Canada interest rates and they won't be mechanical on rates because inflation and wage growth is slower than they anticipated, says Lien. “So they plan to proceed cautiously which basically means that there will be no rate hike in October and a lower chance of tightening in December.”

Market pricing had implied a near 70% chance of another rate hike from the Bank of Canada before the year is out, despite earlier warnings about the Loonie’s strength from deputy governor Timothy Lane.

Canada's currency slipped 0.04% against the Pound, making for a Pound-to-Canadian-Dollar rate of 1.6729 Thursday morning. The USD/CAD rate was quoted 0.08% higher, at 1.2493, during early trading in London.

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The Reserve Bank of New Zealand held the cash rate unchanged at 1.75% as was expected but took markets by surprise when it chose to throw its own curveball in the direction of the Kiwi Dollar Thursday.

The bank told markets that rates will remain low for a “considerable period” and the weaker New Zealand Dollar that results from this will be welcomed as it will help to push up inflation.

“These dovish views drove NZD lower and is likely to keep the currency under pressure in the coming days,” says Lien.

Part of the reason the RBNZ policy statement came as a surprise for markets is that it was expected to be broadly neutral, given it was made by acting governor Grant Spencer, who has taken over from the outgoing Graeme Wheeler while a replacement is found.

"With a new acting Governor in place, policy uncertainties in abundance, and nothing much changed since the MPS, it would be a real surprise if there was any hint of a change. If there is, it would have to be to the more hawkish side," wrote Stephen Toplis, a strategist at BNZ, on Wednesday.

New Zealand also currently sits beneath a cloud of political uncertainty, since an inconclusive election at the weekend gave way to what could now be weeks of coalition building.

“New Zealand First holds the balance of power and will decide, in due course, which way it will lean,” says BNZ's Toplis, referring to the nationalist political party that emerged from the Saturday election as kingmaker, with the third largest share of the vote.

The final result of the NZ election is expected on October 07 while the precise makeup of the coalition that will govern the country over the coming years may not be known until the end of October.

Expectations are that the incumbent National Party will govern with New Zealand First. A Nationals government is seen as the most business friendly outcome although entering coalition with NZ First will mean the adoption of some less pro-business policies..

Notably, the Nationals could now be forced to become more conservative on immigration, adopting much lower caps on the number of inbound migrants permitted to enter the country each year, which is something economists have warned could harm the NZ economy over the longer term.

The dissipation of expectations for another hike in Canada, combined with political uncertainty and central bank dovishness in New Zealand, could mean both currencies remain under pressure against the G10 basket in the coming days. Particularly against the US Dollar, which has benefitted from a Federal Reserve that is staying a course toward higher rates and fresh details of the Trump administration’s plans for tax reforms.

The New Zealand Dollar was quoted 0.24% lower against the Pound during early trading in London Thursday, making for a Pound-to-New-Zealand-Dollar rate of 1.8607. Against the greenback, the Dollar was 0.30% lower, with the NZD/USD pair trading at 0.7197.