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USD/CAD jumps ahead of Poloz speech

by Ashraf Laidi

Is today’s 130-pip rally in USDCAD - biggest daily gain in two months – a sign of key changes to come, or is it simply strong buying along a major trendline support? The pair fell for five consecutive weeks, the longest losing streak since exactly 52 weeks. Growing speculation that Tuesday’s speech by Bank of Canada governor Stephen Poloz may have something to do with the moves in the loonie.

Poloz’ speech, due 16:30 BST, is titled “The Way Home: Reading the Economic Signs” is suspected to move away from sounding the usual optimistic note as was the case since the winter oil plunge. Poloz may use the speech to communicate the BoC’s assessment on whether to raise its 2.0% inflation target as a means to address sub-par economic growth.

As the BoC’s five-year mandate with the federal government nears its end due in 2016, the central bank began publishing research on the effectiveness of the 1-3% inflation band. Simply put, Poloz has publicly described suggested global growth to be a source of “serial disappointment.” A change in the target would hold rates low for longer than usual, which would boost bond yields and sharply weigh on the loonie.

Desperate for policy flexibility

Aside from sub-par domestic and global growth, the BoC could consider reducing the element of temporary and volatile factors and add a suppressing element to the CPI calculation. This would enable the central bank to focus on the longe-term path of price expectations, without necessarily spooking the bond market.

Unlike in the case of the Federal Reserve, Bank of England and European Central Bank, each of which has undershot its inflation target for five to 24 months, Canada’s CPI has undershot the 1-2% band for a brief 3-month period in 2012 before stabilizing higher.

The Canadian dollar’s 7% appreciation against its US namesake since March was dwarfed by other currencies’ gains vs theUSD. But the rapid recovery to four-month highs despite one of the biggest declines in oil has been partly the result of BoC’s aggressive upgrades of its 2015 and 2016 GDP forecasts.

Poloz’s speech will be the final one before the 2-week silent period ahead of this month’s BoC policy announcement. Tuesday’s speech is seen as the opening salvo in a series of indications about a slowly moving topic, which could last into the rest of the year. But if Poloz does address the possibility of a modified inflation target, then markets will have reason to believe that classic monetary policy could be on its way out, macro-prudential measures are in and the BoC will have no choice but to ignore inflation as “noise” if subpar growth from its southern neighbour changes definition from 2.0%-3.0% to 1.0%-2.0%.

Any inflation surprises , would make EURCAD and GBPCAD worthy candidates.


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