Loonie Bulls Are Put on Notice as Poloz Taps Brakes After Rallyby
Central bank flags currency strength as threat to exports
`Don't buy our currency' is Bank of Montreal's takeaway
The Bank of Canada’s Stephen Poloz is signaling to loonie bulls not to push their luck after they reaped the biggest gains in developed-market currencies during the past three months.
The Canadian dollar’s 12 percent rally since Jan. 14 has damped the outlook for the non-resource exports the nation needs to sustain its economic recovery, the central bank said Wednesday. The comments, which led traders to boost wagers on interest-rate cuts, may give pause to speculators who’ve tilted net bets in the futures market in favor of Canada dollar gains for the first time since May.
“They’re saying ‘Don’t buy our currency,’" said Greg Anderson, global head of foreign-exchange strategy in New York at Bank of Montreal. “They’re trying to signal as best they can, indirectly, they don’t want to see the Canadian dollar strengthen any further.”
While the Canadian currency fell on the announcement, the experience of other central banks suggests Poloz may not get what he wants. The Reserve Bank of New Zealand surprised markets with an interest-rate cut last month, only to see the nation’s dollar surge against the greenback amid fading expectations for Federal Reserve rate increases. The Bank of Japan’s move to negative rates in January proved similarly futile as the yen soared to the strongest since 2014.
The loonie, as the Canadian dollar is known for the aquatic bird on the C$1 coin, was little changed Thursday at C$1.2820 per greenback as of 9:07 a.m. in New York, after dropping 0.5 percent Wednesday. One loonie buys about 78 U.S. cents.
The recent rally runs counter to the consensus view, which is for the currency to weaken to C$1.33 per U.S. dollar by mid-year, according to the median estimate in a Bloomberg survey. Canada’s dollar is still about 23 percent cheaper than at the end of 2012, after a historic three-year depreciation.
The central bank’s mention of the adverse effects of a strong currency followed a 10-week rout for futures speculators counting on loonie losses. Hedge funds and other large speculators betting against the Canadian dollar were forced into their longest sustained retreat since 2001, according to data from the Commodity Futures Trading Commission. For the first time since May, bulls outnumbered the bears last week -- if only by 97 contracts.
“If there was any intent to at least prevent the best performing G-10 currency in the last three months from rallying further, the bank can say ‘Mission accomplished,’" Jimmy Jean, a strategist in the fixed-income group at Desjardins Capital Markets in Montreal, wrote in a note to clients. “‘Don’t get too carried away’ is the central narrative.”
While Poloz upgraded his economic forecasts, he said much of that was because of federal-government fiscal stimulus. Absent that boost, he said he might have had a bias to lower interest rates, after officials cut estimates for global growth, net exports and energy investment since their last monetary policy report in January.
The market-implied probability that the central bank will cut its 0.5 percent benchmark rate this year rose to 23 percent from about 15 percent Tuesday, according to Bloomberg calculations based on trading in overnight index swaps. The bank reduced rates twice last year.
“Poloz has been looking for this rotation away from the resources sector to the non-resources sector and a weak Canadian dollar really helped engender that rebalancing,” said Calvin Tse, head of U.S. currency strategy for Morgan Stanley in New York. “Continued strengthening of the Canadian dollar is going to hurt the positive rotation in their economy.”