Staying the Course


WHAT WERE THEY THINKING? - Well..it didn't play out as I had expected. I have been watching markets for many years now and after doing so, you get a good feel for how things go. At the same time, you're also reminded that anything can happen. Yesterday's Bank of Canada move is beyond shocking in my view. In a world where every other central bank is committed to normalizing monetary policy at a snail's pace, the Bank of Canada has opted to go in a different direction. While there is no denying an improvement in the health of the Canadian economy, we are also living in a fragile world where any number of catalyst could quickly stifle a recovery. The Bank of Canada did not need to hike rates on Wednesday and could have just as easily accomplished the same objective with a hawkish hold. But now, if things do start to get shaky around the globe, or if Canadian data takes a turn for the worse, the higher rates will end up doing much more harm than good.

cartoon sep 7

BOLD OR RECKLESS? - When you look at monetary policy strategy on the whole over the past 8 years or so, it has been a strategy led by the Fed. The Fed was the first to respond to the global crisis and should be the first to lead the global economy out of crisis. Much of the Fed's cautious approach over these years has extended well beyond US borders, with the Fed well aware of the fragility of things. And so, for the Bank of Canada to be moving forward, and now seemingly ahead of the Fed, is either an extremely bold move or an absurdly reckless one. Only time will tell, but from the perspective of this desk, the currency has run way too far and fast and we have been sitting back since last Friday, waiting for another opportunity to jump in and build back into a short Canadian Dollar position. At the moment, the trade is quite risky and it's very possible the market continues to drop. At the same time, the levels are there for us and I love the trade. It would seem that there should be a catalyst at any moment to trigger a reversal the other way, but we will just have to wait and see.

The Canadian Dollar just extended its wild run in 2017 and we're short the Loonie.

THE OTHER WAY - Of course, today we get what had been the most highly anticipated central bank decision of the week, with the ECB out in just a bit. The Euro has been holding up well in 2017, trading just off 2.5 year highs and showing no signs of backing down. The Euro has benefited from a more promising Eurozone outlook and gestures from the ECB with respect to getting going with that policy reversal. But at the same time, the US Dollar has been the primary driver of Euro strength this year, with so many things going against the Buck. Soft US Dollar policy, White House uncertainty, weaker US data, a scaled back Fed outlook, debt ceiling risk and hurricane season have all inspired a massive rejection of the Buck. It's been so bad for the US Dollar of late that the world's most liquid currency can't even catch a bid in periods of flight to safety. So right now, there's no hope for the Buck and everyone is loving the Euro, Canadian Dollar and everything else out there. So what't the play? From my experience, these are the times you want to be getting away from the crowd.

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