Going into this week, the European Central Bank (ECB) meeting was the major event markets were watching. It did not disappoint, but much of its thunder was stolen by the Bank of Canada's (BoC) decision a day earlier.
Starting with the Canadian central bank on Wednesday, we saw a 25 basis point increase in its benchmark interest rate to 1.00%. For those keeping score at home, that brings the BoC back 25 basis points lower than the U.S. Fed Funds target. The hike was not as much of a surprise as the timing was. There is a lot of Canadian economic data coming out in front of the October BoC meeting and markets expected Governor Stephen Poloz to wait for that data to print before continuing its hiking spree.
The decision also underscores the output gap structure of the Bank of Canada's policy strategy. It seems so confident that GDP growth will take up any slack in the economy that it is willing to risk such a move while still partially in the dark about the latest economic data.
For us on the FX desk, the big news is that the Canadian dollar is at its strongest level in two years with what looks like more room to get even stronger.
Across the Atlantic, the ECB had its closely watched meeting on Thursday. ECB President Mario Draghi delivered the usual central bank comments about watching the exchange rate, but if he and his colleagues were really concerned about the strength of the euro, they know how to put a stop to it –more severe warnings. The euro actually spiked higher going into the decision but came off a bit after the post-meeting press conference.
The real drama surrounding the ECB these days is when it will release more details about winding down its quantitative easing program. This strongly looks like it will be at an October meeting.
The bottom line for both central banks is that they are acting in a manner that exudes a pretty darn decent amount of confidence – almost to the point of arrogance to some people.
My View: Both banks are riding a wave of success and growth this year, so why change the narrative? We will see if they continue with this winning streak as we go into the fall.
|The information in this report was compiled by the staff at City National Bank from data and sources believed to be reliable but City National Bank makes no representation as to the accuracy or completeness of the information. The opinions expressed, together with any estimate or projection given, constitute the judgment of the author as of the date of the report. City National Bank has no obligation to update, modify or amend this report or to otherwise notify a reader in the event any information stated, opinion expressed, matter discussed, estimate or projection changes or is determined to be inaccurate. This report is intended to be a source of general information. It is not to be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the reader’s specific investment objectives. Any financial instrument discussed in this report may not be suitable for the reader. Each reader must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment. City National Bank (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this report and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.|