Ex­porters, traders feel cur­rency pain as BOC avoids guid­ance

The Gulf Today - Business - - 6viewpoint -

TORONTO: The Bank of Canada’s (BOC) jour­ney from dove to hawk and back again this year has sent the cur­rency mar­ket on a wild ride and put pres­sure on the cen­tral bank to pro­vide bet­ter di­rec­tion, de­spite es­chew­ing its for­ward guid­ance pol­icy years ago.

The Cana­dian dol­lar has swung from a 13-month low of C$1.3800 in May to a two-year high of C$1.2063 in Septem­ber, be­fore re­vers­ing course again this week, all in con­cert with shifts in tone from the bank and its un­cer­tain mone­tary pol­icy path.

The bank re­it­er­ated that the out­look for in­ter­est rates is data de­pen­dent. But greater clar­ity on the di­rec­tion and speed at which it ex­pects to move rates could help re­duce volatil­ity in the Cana­dian dol­lar and al­low end users to bet­ter man­age their ex­po­sure to the cur­rency.

“We try to hedge and we try to plan. And the volatil­ity that (came from) the way they acted, it’s im­pos­si­ble to plan,” said Alain Cute, ex­ec­u­tive vice-pres­i­dent at Genetec, an ex­porter of video sur­veil­lance sys­tems with Cana­dian ex­penses and US sales.

Af­ter back-to-back rate hikes in July and Septem­ber, Gover­nor Stephen Poloz sig­naled this week a third rate hike is not im­mi­nent, re­vers­ing re­cent Cana­dian dol­lar strength and once again rewrit­ing an­a­lyst ex­pec­ta­tions for fu­ture moves.

That sliced 1 per­cent from the Cana­dian dol­lar, the largest one­day drop by the cur­rency since Jan­uary, when Poloz said a rate cut was still on the ta­ble.

“Part of these (mar­ket moves) are knee-jerk re­ac­tions; they say one thing with one tone on one day and then they say another thing with another tone on another day,” said Rahim Mad­havji, pres­i­dent of Knightsbridge For­eign Ex­change. “There def­i­nitely could be bet­ter com­mu­ni­ca­tion.”

The cur­rent sig­nal to fo­cus on data means rate de­ci­sions may be made at the last minute, based on the most re­cent eco­nomic data.

By con­trast, the Fed­eral Re­serve said the path of US in­ter­est rates would be higher and grad­ual, al­low­ing the mar­ket to price in a re­strained pace of Fed rate hikes and bal­ancesheet re­duc­tion. “The mar­ket has ac­cepted that the Fed is hik­ing rates. We haven’t seen the knee­jerk re­ac­tion we’ve seen in Canada this year,” said Jimmy Jean, se­nior econ­o­mist at Des­jardins Cap­i­tal Mar­kets.

“The prob­lem we are deal­ing with here is Poloz’s views on the mat­ter of pro­vid­ing guid­ance. We know he is not too fond of that,” Jean added.

Poloz aban­doned for­ward guid­ance in 2014 in a bid to cre­ate less volatil­ity, say­ing the pol­icy of an ex­plicit tight­en­ing or eas­ing bias should be re­served for ex­tra­or­di­nary times.

But by re­mov­ing the proac­tive op­tion, the bank has shifted to a re­ac­tive stance, with both Poloz and Deputy Gover­nor Tim Lane com­ing out to talk down the Cana­dian dol­lar in re­cent weeks af­ter the cur­rency’s strength put growth at risk.

For ex­porter Cote, who said he lost mil­lions of dol­lars “in 10 min­utes” af­ter Septem­ber’s sur­prise hike, a smoother ride is the goal.

“If there is a way to avoid that kind of whip­saw, that kind of gy­ra­tion in the fu­ture, that would be cer­tainly ap­pre­ci­ated by me and the likes of me.”

There is no pre­de­ter­mined path for Cana­dian in­ter­est rates and the cen­tral bank’s next move will de­pend on in­com­ing data, Poloz said on Wed­nes­day in a speech that sug­gested a third rate hike is not im­mi­nent.

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