Morning Commentary: Northern Neighbors: Holding Steady

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

Northern Neighbors: Holding Steady  Share this story: Andrew Kositkun Senior FX Advisor

The Bank of Canada held its policy rate and the parameters of its QE program unchanged at its meeting yesterday morning. The bank also struck an upbeat tone in its policy statement that reflected the positive effects of earlier-than-expected vaccine developments and rollout. The positive medium-term outlook is also justified by continued policy support and overall global recovery and vaccine effort. The near term, however, still has its challenges as the reinstatement of COVID-19 restrictions weighs on economic activity.  In acknowledgment of near-term challenges, the bank kept its forward guidance unchanged and reiterated that its policy rate will remain at the lower bound until slack is absorbed in 2023 per the bank’s forecast. As with the Fed, expect the Bank of Canada to push back on any premature expectations for QE tapering by committing to keep interest rates low across the yield curve. As would be expected, the Canadian dollar (CAD) strengthened following the release of the bank’s statement, as markets expected a more cautious tone amid the ongoing COVID-19 outbreak, while long-end rates reacted in a more muted fashion, reflecting the fact that a reduction in asset purchases is unlikely to come in the near term.  Overall, the CAD outlook remains constructive. The rebound in economic activity has been more forceful than expected, and lockdowns remain more targeted. Test-positivity rates and new cases also remain below equivalent measures seen in peer countries. The overall narrative of vaccine rollouts and economic normalization should support G10 currencies. Within this, petro currencies such as the CAD could outperform as oil prices get a boost from a sustained recovery in mobility and external demand. The potential for greater fiscal stimulus in the U.S. under the Biden administration is also a positive for Canada given the country’s sensitivity to U.S. domestic demand, as stronger growth in the U.S. should provide further support to Canadian export growth and investment activities.  HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: U.S. initial jobless claims came in better than expected. New filings dropped to 900,000 against expectations for a 935,000 print. Continuing claims also beat consensus, as they came in at 5.05 million against expectations for a 5.3 million print.  President Joe Biden is expected to sign another 10 executive orders today, with the focus on the COVID-19 pandemic. Biden is expected to overhaul and unify the approach to testing, use federal powers to stabilize the medical supply chain, and boost vaccine distribution. He will also require people to wear masks in airports and on planes while enforcing quarantines on arrivals from other countries.  The European Central Bank kept rates on hold as widely expected. The bank also affirmed the size of its Pandemic Purchase Program and reiterated that the program would run through at least the end of March 2022. Furthermore, the bank emphasized that it stands ready to adjust all instruments as needed.  The Bank of Japan left its rates and asset-buying strategies unchanged. The bank also underscored its commitment to keeping tight control of its yield-curve control program. Market focus now shifts to the March 18–19 meeting, at which the bank will release the results of its framework review that was unexpectedly announced last December.  Norway’s central bank left rates unchanged and continues to show rate hikes in the first half of 2022. Vaccine rollouts, which have been somewhat faster than assumed, is a key factor behind the bank’s relatively upbeat outlook.  Australia reported another solid jobs report. Total employment rose 50,000, meeting expectations. The mix of full-time to part-time jobs was also favorable, with full-time jobs accounting for over 71% of the employment gains.  The U.K. is reportedly in the process of extending support to the labor market in the coming months, as the existing jobs program ends in April. Notably, Bank of England Governor Andrew Bailey sounded relatively optimistic about the economic consequences of the latest lockdown.  China announced sanctions against 28 former Trump administration officials that the country sees as architects of the hawkish U.S. China policy. This is the first time China has sanctioned U.S. individuals. Markets will be closely watching how the new Biden administration handles China. Incoming Secretary of State Antony Blinken has been quoted as saying that he disagrees with how Trump implemented his China policy but that Trump was right to take a tougher approach. Overall, the expectation is for the U.S. to take a more pragmatic approach.

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