The opinions were split on whether the Bank of Canada would hike – now the hike cat is out of the bag and the Bank even left room for more hikes to come. But will the Canadian economy cooperate with the BoC’s still sanguine expectations?
Japan's MoF talks tough, BoJ not so much.
Japan's Minister of Finance Noda was out overnight talking tough on the strong yen, suggesting that he stood ready to take "bold" action, including the possibility of intervention. JPY crosses rose a bit on the development, though it was just as easy to argue that the JPY consolidated slightly on the bond rally easing off from yesterday's strong rally. Also, the BoJ's Shirakawa was out saying that the bank stood ready to move if the economic outlook deteriorates (ideas include debt monetization), but he also said that a strong JPY could actually help right Japan's terms of trade in the long run and be good for it's businesses and households. The Bank has generally appeared more constrained in its readiness to act further than one might guess from the level of deflation in the Japanese economy. The will to intervene may be less important than the will of the bond market these days - that's where the real pressure on the JPY to either rise or fall will come from until further notice.
PIIGS woes
The Euro remains on a relatively weak footing as sovereign debt spreads continue to put pressure on the currency. There is a particular focus on Ireland at the moment, as 10-year debt yields there have blown more than 25 bps wider this week. Yesterday, the Irish government extended government guarantees on short-term bank liabilities that were otherwise set to expire at the end of this month, but this failed to inspire any confidence and rumors on Irish banks seem to be swirling again. CDS prices on some Irish banks, particularly Anglo Irish Bank, have headed higher recently. Portuguese debt is also under severe pressure. With EURUSD trading around 1.2700, it feels like the market hasn't done much to price in a renewal of the PIIGS crisis and that the risk remains to the downside. Don't we remember that EURUSD has traded below 1.20?
Bank of Canada
The Bank of Canada hiked rates 25 bps to bring the policy rate to an even 1.00%. The market was fairly split on whether the bank would hike here. The rhetoric in the statement is perhaps more hawkish than one would have expected, as the bank said that it expected Canadian consumption and investment to stay strong and that financial conditions are still "exceptionally stimulative". It did express a great degree of uncertainty on the future, however, and said that the Canadian recovery would be "slightly more gradual" than it expected in July, and attributed much of the uncertainty on the outlook to the US. So the rhetoric is a dovish downgrade from the previous BoC meeting, but the market had perhaps moved even further to the dovish side in its expectations. After trading above 1.0500 overnight in a false break of the key 1.0480 area, USDCAD is understandably having a look back toward recent support since this rate hike was not fully priced in. Also adding a bit to CAD's shine was a slightly better than expected July building permits number.
The comment from the BoC that it still believes rates are exceptionally stimulative should mean significant support for CAD as long as risk appetite remains healthy, because it may see the market adjusting the future expectations higher here. But it will take a very persistent rally in risk appetite and crude oil prices to get USDCAD through the bottom part of the recent range below 1.0150, and Canada may find that the US malaise will sweep north of the border more widely in the months to come since much of Canada's "recovery" has been a product of the stimulus brought about by 0.25% and the add-on boom this triggered in housing. That stimulus is now being taken away, though at the long end of the curve, it is still very much there in the mortgage market.
Let's see if the Ivey PMI out shortly rains on the CAD's parade today. Last month's number was a very weak one for July (Ivey PMI is not seasonally adjusted)
Looking ahead
It is difficult to imagine what will give the recent uptick in risk appetite further fuel here. If what we have seen from the Obama administration thus far (a fresh $50 billion on roads and infrastructure and the business tax credits), then the market shouldn't have any reason to believe that the economy is about to turn the corner in the near future. The tax credit for investment approach is a basically a non-starter anyway, since the problem is end-demand more than a problem of gaining access to credit.
Remember the awful 1980's hit from Bobby McFerrin called Don't Worry, Be Happy!. If we simply replace "be happy" with "buy Aussie", we seem to have the basic market theme for the currency market at the moment. Like the song after about 30 seconds, it is getting very tiresome and mindless. Let's see how long the market can keep it up. It is interesting to note that AUDNOK touched a new 13-year high today as the weak EUR is dragging the NOK lower while the Aussie is enjoying endless love from its high yield, the resilient risk appetite of late, and Australia's China exposure. There ought to be value in fading that pair's rally already at these levels, though if we get an out-and-out Euro crisis on our hands, the valuation can stretch even farther before any snap-back. Watch the Asian session for Australia's Employment report for August to see if the market can continue to not worry and buy Aussie.
Watch out later today for the US Fed's Beige Book for comments from the Fed on what it is seeing "on the ground" in the various districts. The US consumer credit data is also interesting as it really shows the secular trend in credit contraction in the US economy.
Chart: US Consumer Credit
Notice how the 2008 crisis simply "broke" the massive and seemingly ever-increasing US consumer credit expansion. The trillions of dollars of public sector efforts since then have failed to even cause the slightest bump in the consumer's determination (and need) to deleverage. That's why we have a double dip risk, because the trend is more likely to continue downward for some time until consumers feel that they have retrenched sufficiently and there is no significant new gravy train on the way from the public sector this time around.
Economic Data Highlights
- US Weekly ABC Consumer Confidence rose to -43 vs. -44 expected and -45 last week
- Japan Jul. Machine Orders rose +8.8% MoM and +15.9% YoY vs. +2.0%/+8.1% expected, respectively
- Japan Jul. Adjusted Current Account Total out at ¥1464B vs. ¥1363B expected and ¥1362B in Jun.
- Australia Jul. Home Loans rose 1.7% MoM vs. +1.0% expected
- Japan Aug. Eco Watchers Survey Current/Outlook out at 45.1/40 vs. 49.9/46.4 expected and 49.8/46.6 in Jul.
- Germany Jul. Trade Balance out at 13.5B vs. 13.0B expected and 14.2B in Jun.
- UK Aug. Halifax House Prices rose +0.2% MoM and +4.6% YoY vs. -0.5%/+4.4% expected, respectively
- Sweden Q2 GDP final revision adjusted up to 1.9% QoQ vs. 1.2% originally
- UK Jul. Industrial Production rose +0.3% MoM and 1.9% YoY vs. +0.4%/+2.0% expected, respectively, and vs. +1.3% YoY in Jun.
- UK Jul. Manufacturing Production rose +0.3% MoM and 4.9% YoY as expected, and vs. 4.0% in Jun.
- Germany Jul. Industrial Production rose +0.1% MoM and +10.9% YoY vs. +1.0%/+12.5% expected and vs. 10.7% YoY in Jun.
- New Zealand Aug. QV House Prices rose +3.1% YoY vs. +4.1% in Jul.
- Canada Jul. Building Permits fell -3.3% MoM vs. -4.9% expected
- Canada Bank of Canada raised rates 25 bps to 1.00%
Upcoming Economic Data Highlights
- Canada Aug. Ivey PMI (1400)
- UK Aug. NIESR GDP Estimate (1400)
- US Fed's Beige Book (1800)
- US Fed's Kocherlakota to Speak (1830)
- US Jul. Consumer Credit (1900)
- US Weekly API Crude Oil and Product Inventories (2030)
- New Zealand Q2 Manufacturing Activity (2245)
- Australia Aug. Employment Change and Unemployment Rate (0130)
- Japan Aug. Consumer Confidence (0500)