Critical Juncture for C$!
The recent “hot” readings in Canadian CPI figures have put the BOC’s Stephen Poloz in the hot seat. While most Canadian consumers have bemoaned the readily apparent rise in inflation in our everyday lives, the folks that calculate inflation are now just starting to catch up. Core CPI looks now set to hit the BOC’s 2% target well in advance of 2016. Add in Canada’s chronic underachievement in productivity and Mr. Poloz is in tough. When may things change? July 16th to be precise, when he meets Mr. Market with his monetary policy report and interest rate announcement. While a rate hike is extremely unlikely, the market will be watching carefully for clues as to if or when policy might change.
Our best guess is that Mr. Poloz will bring out his best dancing shoes and try to convince the market that the rates need not rise for a long time. The canary in the coal mine is of course the Canadian household/ consumer. You know the one that is up to his gizzards in debt and, relative to other countries (see chart below), keeps moving up.
A jump in lending rates will also damage our overvalued property markets – especially those in condo crazed Toronto. Mr. Poloz knows this all too well. Highly levered economies can’t stand higher rates for long as the folks at Pavilion recently noted; “Canada remains the perfect candidate for a “lower-for-longer Central bank stance – even longer than the Fed”.1
Higher expected rates are lighting a fire under the C$ which is now up over 1% YTD versus the USD. This is bad news for everyone - especially me because I am very short the C$! It is also bad news for our exporters and tourism industries – but not so for Albertans awash in oil and gas. Those prices continue to climb on the back of a better US economy, tightening spreads and Iraqi instability. Higher energy prices clearly do not help the BOC either.
We are patiently waiting for the C$ to settle into a new level. In the meantime, I am going to wake-up our trader and tell him he may finally be able to trade in a few weeks time – we will look to get materially shorter. Hopefully this is the start of some decent volatility.
Have a great holiday long weekend!
1. Pavilion Corporation, Global Strategy Note, page 3, June 26, 2014