CAD dropped by dovish BoC, focus swings to ECB

The new Bank of Canada statement issued yesterday showed Governor Poloz and company are far more concerned about the trajectory of the global and Canadian economy than their peers down in Australia. The statement noted “increased uncertainty about the timing of future rate increases” and expressed surprise at the steepness of the growth slowdown in Q4.

At the same time the bank expects weaker growth for the first half of this year. The cautious tone has eliminated almost all of what little anticipation remained that the Bank of Canada will hike rates this year – or even next.

Trading interest

•         Maintaining EURUSD downside view (previously through put options and more recently having added spot) as long as we remain well below 1.1400, but concerned for the USD outlook if momentum doesn’t pick up into the weekend.

•         Looking to take off USDCAD longs near current levels (1.3440) today given that USD price action elsewhere is sluggish and CAD could pick up in the crosses if US data tomorrow is strong.

•         Maintaining AUDUSD shorts with tightened stops (not far below 0.7100). 

•         Like EURGBP downside via put spreads for expiry over summer – either we get soft Brexit or a delay that leads to a longer delay that eventually sees anticipation of a second referendum shaping up.

•         EURJPY: looking to add to shorts next week if punches through and closes below 126.00 to close this week.

Looking across the rest of FX land, few fresh impulses stick out. Sterling has righted its keel but remains in the recent range ahead of next week’s key votes, the USD is going nowhere in a hurry after teasing below local support in AUDUSD yesterday and below the 1.1300 level in EURUSD, and EM is rather quiet, though TRY volatility picked up in the wake of yesterday’s Central Bank of Turkey meeting, despite the attempt at expressing a hawkish bias. Turkish president Erdogan is in hot diplomatic water with the US administration on its expressed intent to purchase Russian missiles.

The focus today swings to the European Central Bank, where visions of targeted longer-term refinancing operations, TLTROs, are dancing in our heads. A fresh TLTRO was likely an inevitability as the 2016 4-year TLTROS expire mid-2020 and banks can begin renewing these as early as mid-2019 with 12-month funding.

Any new TLTRO may offer less generous conditions than the previous round, and the bank could also. Regardless, TLTROs are weak policy beer – the EU economy is only going to turn around more forcefully with a fiscal impulse and more thorough elimination of banks’ legacy balance sheet issues.

The question then is will this event risk offer any new twist for now for the single currency? The most likely source of volatility would be a pointed downgrade of ECB growth and inflation forecasts, which would suggest a rising risk of more forceful policy options down the road (and yet, the empty toolbox problem – ECB can only do effective QE again if EU governments are loosening their pursestrings!).

Still, it’s hard to get a feel for the anticipation when the market has failed to move for months, and the risk is that the euro may trade passively to developments elsewhere, like a stronger US dollar if tomorrow’s employment report shows strong wage growth or a stronger JPY if weakening risk sentiment slides further.

Chart: EURUSD

We are witnessing one of the least volatile episodes in EURUSD’s history. Earlier today I tweeted out that the three-calendar month trading range has been sub-3.0% for the first time in the pair’s history – almost matched by an episode of low volatility in early 2014 before an enormous slide was set in motion by USD strength and EUR weakness in anticipation of the policy divergence of Fed rate hikes and ECB QE on its way in early 2015.

It’s hard to gin up a scenario in which such dramatic policy divergence can shape up again, but greater volatility will surely return in the weeks and months ahead as we get to the other side of US-China trade negotiations and get a further sense of the trajectory of the global economy. For now, focus is on the downside break level of 1.1217 and whether this leads to a test of 1.10 and even 1.08, while bulls will sit on their hands awaiting a 1.1500+ break. It’s been a long wait!