David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with DavDeborah B
The Bank of Canada raised rates again Wednesday to 1 per cent from 0.75 per cent, and sure didn't indicate it was willing to press the pause button just yet.
At $1.24 (or 80.65 U.S. cents), I was willing to say that this is very CAD-bullish, but the loonie moved to $1.22 (81.97 U.S. cents) so quickly that it is difficult to get even more positive except to say that the charts do show a test of $1.20 (83.33 U.S. cents) is a strong prospect, and the one thing we know about charts is that they don't lie like statistics do.
The 2-year Government of Canada yield has soared 7 basis points today to 1.42 per cent to stand at a 12 basis point premium to its U.S. counterpart, something we have not seen since May 2015 when the CAD was sitting pretty at $1.20. This spread, along with a $49 per barrel oil price, actually is consistent with the Canadian dollar around $1.22 as well — where we are now … so any pullback in the currency will likely only be temporary and an opportunity for the bulls to move back in.
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As was the case with the last meeting, the wording of the press statement was as interesting as it was informative (without giving too much away) — and there were some new wrinkles to consider.
Growth has been better than expected and inflation has come in largely as expected. The view is that the economy has become "more broadly-based and self-sustaining." The Bank sees "strength" in exports and business investment and a "robust" consumer. The Bank acknowledges the "cooling" in "some" housing markets — obviously not a concern.
The Bank does not seem overly concerned with the Canadian dollar and stated that the strength reflected "a weaker U.S. dollar against many major currencies" and "also reflect[ed] the relative strength of Canada's economy." After all, with U.S. auto sales down 6.3 per cent over the past year and Canadian auto sales up 6.9 per cent over the same time, wouldn't one expect the currency of the latter to be outperforming the former? In fact, while the CAD is up 4.5 per cent against the greenback since the previous meeting back on July 12, it is basically flat against all other currencies … and on a trade-weighted basis, has appreciated 2.7 per cent. Not exactly enough to throw the BoC off course.
In a nod to Lael Brainard, the Bank did say that "wage and price pressures are still more subdued than historical relationships would suggest, as observed in some other advanced economies."So like most industrial countries, Canada too has a fairly flat Phillips curve. Again, something that keeps a lid on how far the BoC goes, but not enough to prevent further near-term adjustment to an economy not that far off full-employment nonetheless.
Now what is interesting is that the Bank left the door open for another rate hike and a full closing of the overnight rate gap between Canada and the U.S. It did this by saying, deliberately, that the rate move today only removes "some of the considerable monetary stimulus." The key words are "some" and "considerable." While there is still deemed to be "some excess capacity in Canada's labour market," at issue is whether this is consistent with what is still considered to be "considerable" policy stimulus in the system.
At the same time, the Bank did try and contain rate-hike expectations from gaining too much ground, claiming that "monetary policy decisions are not predetermined" and that "particular focus" will be paid to "the evolution of the economy's potential and to labour market conditions." The Bank then added this — "given elevated household indebtedness, close attention will be paid to the sensitivity of the economy to higher interest rates." All code for a go-slow approach, but leaving the door open for another move nonetheless.
The next BoC meeting is Oct. 25, and as of now, the market is only 35 per cent of the way towards pricing in any move for that confab, but is closer to 65 per cent for the Dec. 6 meeting. This puts this Friday's jobs data for August into focus, but any strength would have to be followed up in the September report come Oct. 6 (three weeks ahead of the next meeting — the BoC will thus have two more reports before this meeting). By Dec. 6, the Bank will have October data on Nov. 3, and the November data is on Dec. 1 (so by the late-year meeting, the BoC will have the luxury of seeing how resource slack in the labour market has evolved over four data points).
I would have to think that insofar as the Bank was willing to move today without a hike fully priced in (less than 50-per-cent odds were discounted yesterday), and with Fed rate-hike odds almost vanishing for this year, the loonie's strength, the GTA housing market rolling over, and inflation below-target, the bar is low for the Bank of Canada to move again.
It should now be obvious that just by staying silent (we have not heard from any BoC official since the last meeting), the BoC is not at all constrained from a communications standpoint (or lack thereof) from making a policy move even with the markets not fully priced for one.
All else equal, if the unemployment rate, which has declined from 6.9 per cent at the turn of the year to a cycle-low 6.3 per cent presently, drops any further, the window will be wide open. Remember that when we were last at 6.3 per cent on the jobless rate, which was nearly nine years ago, the overnight rate was 2.25 per centr, not 1.0 per cent. While inflation was higher then, we were also embarking on a huge recession — not experiencing a "broadly-based and self-sustaining" expansion (in fact, back then the Bank came right out and said "the global economy appears to be heading into a mild recession, led by a U.S. economy already in recession"…and the policy rate was 125 basis points higher compared to where it is now, even after today's increase).
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David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.