Interbank Market News Scan: The Bank of Canada held its policy rate today, but I was nervous about USD-CAD

The Bank of Canada today held its policy rate at .25% citing the effectiveness of its quantitative easing program which is currently comprised of asset purchases of CAD 2 billion a week. While seeing a recovery in its economy, Covid-19 and supply chain disruptions were noted as the usual suspects for dampening of economic growth in certain sectors.

The Bank noted contraction in its export sector, in particular its auto industry with consumption, business investment, and government spending contributing to Canada’s economy.  Inflation is running around 3.7%, much hotter than its 2% target.

From a yield and inflation aspect, I could not see why Americans would want to move dollars into Canada’s economy.  Granted U.S. inflation, at 5.4% over the last 12 months, is running hotter than inflation in Canada.  However, according to data from Bloomberg, ten-year treasury yields are higher in the U.S. (1.35%) than they are in Canada (1.21%).

Yesterday, data from Reuters showed the USD/CAD closing around 1.2621 and I quite frankly thought (in my gut) that the exchange rate would decrease by 11:00 am EST but decided to hold out for the Bank of Canada narrative on rates.  I did not see much change in this report versus last month’s monetary policy release.  I also did not see any calls for changes in monetary policy which added support, in my opinion, to an expected increase in USD/CAD.

The takeaway for me is there is nothing wrong with listening to your gut but always challenge the feeling with data and vice versa. 

Please feel free to share thoughts on central bank decisions and foreign exchange.  

Happy Star Trek Day!

Alton Drew

8 September 2021

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Interbank market news scan: Can central banks play social justice warrior? Are traders prepared for a rate increase?

Banks now tackle diverse issues, be it Covid-19, climate change or inequality. Purists may disagree but there’s no other option. Central banks aren’t what they used to be – and the better for it | Business | The Guardian

After standing shoulder-to-shoulder for much of the pandemic, traders are preparing for the day the world’s central banks begin to move apart on policy. Traders Map Out Day When Central Banks Finally Raise Rates (msn.com)

Lawmakers in Brazil vote to grant their central bank autonomy. Brazil passes law giving autonomy to central bank | Financial Times (ft.com)

A top Bank of Canada official called the recent spike in cryptocurrency prices “speculative mania,” and said such assets don’t have the qualities to become the money of the future. Crypto Boom Is ‘Speculative Mania,’ Bank of Canada Deputy Says (msn.com)

Sudan’s new cabinet faces pressure to push through rapid currency reform or risk endangering its path to debt relief and to international financial support for its shaky political transition, diplomats and analysts say. Analysis: Delay in currency reform puts donor support for Sudan at risk | Reuters

Currency pairsExchange Rate as of 4:15 pm 8 February 2021(1) As of 3:31 am EST Exchange Rate as of 11 February 2021(2)
AUD/USD0.7656 0.7744
USD/CAD1.2781 1.2676
USD/CNY6.4664 6.4557
EUR/USD1.2035 1.2124
USD/INR72.8500 72.7700
GBP/USD1.3714 1.3830
USD/JPY105.4400 104.5800
USD/MXN20.1300 19.9970
USD/DKK6.1785 6.1332
USD/NOK8.5428 8.4650
Sources: (1) Federal Reserve, (2) Reuters

Interbank market news scan as of 12:42 am AST: #centralbanks, #financeministries

ICICI Bank on Thursday said it has executed its first interbank-money market transaction linked with Secured Overnight Funding Rate (SOFR) through its Hong Kong branch. This transaction is part of the bank’s Benchmark Transition Management plan to assess the preparedness towards a smooth transition to the new Alternative Reference Rates (ARRs), the Bank said in a statement. ICICI bank makes its first interbank-money market transaction linked with SOFR – The Hindu BusinessLine

A battle between one of Mexico’s richest men and one of its most respected institutions appears to have ended in a victory for the central bank. Billionaire Loses to Mexico Central Bank in Battle Over Cash (msn.com)

The Bank of Japan and the European Central Bank both had monetary policy meetings, but as widely anticipated, left their current policies unchanged, while pledging to continue supporting economies through the pandemic. The announcements have no impact on currencies, with financial markets trading on sentiment. https://www.fxstreet.com/news/forex-today-unimpressive-central-banks-dollar-in-trouble-202101211939

Both the Bank of Canada and European Central Bank met in recent days, setting the tone for 2021: more easing is possible, but might not be needed. https://www.dailyfx.com/forex/fundamental/central_bank_watch/2021/01/21/central-bank-watch-boc-ecb-interest-rate-expectations-update-january-21.html

The Bank of International Settlements has outlined plans to embark on a variety of CBDC trials worldwide this year. https://cointelegraph.com/news/the-central-bank-of-central-banks-is-building-a-cbdc-settlement-platform