Flight of the doves

The official line from global central banks is still, in the vast majority of cases, that monetary policy will remain relaxed for the foreseeable future. However, investors are now looking carefully for signs that the dovish dogma might be losing its grip. They have found a couple.

A case in point was Wednesday’s policy statement from the Bank of Canada. It left interest rates unchanged, made no alteration to the quantitative easing programme and projected that inflation would not rise to its 2% target before 2023. Yet the Canadian dollar jumped almost half a US cent and held onto the gain overnight. It did so despite “key messages” in the statement about lockdown “restraining economic activity and imposing new hardships on households and businesses” as well as high unemployment in service industries and considerable economic slack.

But, “the recuperation in the Canadian economy is now more secure, and medium-term growth is forecast to be stronger”. Moreover, an observation that the strengthening Loonie poses a risk to output growth did not have the, presumably intended, effect of discouraging buyers of the currency.

NZ rate outlook

Over the last three months, Westpac has progressively wound back its forecast of aggressive rate cuts by the Reserve Bank of New Zealand. It took a step further in that direction overnight, and now predicts that rates will fall no further.

The NZD, which had already been gaining ground, received an extra boost from Westpac’s comment. It was the day’s top-performing major currency, strengthening by an average of 0.7% and adding a cent and a half against sterling.

There was similar, though less specific, help for the pound. A week after the Bank of England governor all but ruled out negative interest rates, economists elsewhere are toning down their predictions of further rate cuts by the Old Lady. The head of research at MUFG, a Japanese bank, wrote that “further progress in vaccinations (a pick-up in the daily rate) by the time the [Monetary Policy Committee] meeting takes place on 4th February may prove enough to hold off on any additional monetary easing”. Sterling was on average a touch firmer on the day with gains of two fifths of a cent against the USD, EUR and CHF.

BOJ holds steady

The Bank of Japan announced earlier today that it would leave policy unchanged, having already provided enough stimulus in response to the tragic Covid-19 pandemic. The bank upgraded next year’s GDP growth forecast from 3.6% to 3.9%.

There was an upward reaction from the yen but it did not last long. The JPY is all but unchanged on the day against the GBP and on average. The Australian dollar is three fifths of a cent firmer, although there was nothing obvious to take it higher. Employment data for December could not take the credit: the 50k new jobs were exactly in line with expectations.

Central banks will continue to be the focus of investors' attention today. Norges Bank is first out of the traps at 0900h. It is expected to keep its benchmark rate at zero. The European Central Bank at 1245h is followed 15 minutes later by the South African Reserve Bank. No changes are expected there either. The real interest will be on the ECB press conference at 1330h.