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EURCAD at 1.50 and Still Normalizing - Global Exchanges

FICC Podcasts mars 09, 2021
FICC Podcasts mars 09, 2021

 

Disponible en anglais seulement

In this episode we discuss the recent down to 1.50 in the EURCAD exchange rate and the fundamental drivers that we think are behind it. We also discuss this week’s ECB and BoC policy meetings. We give our outlook for the two central banks’ policy paths through the end of the year along with our outlook for EURCAD.


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About Global Exchanges

BMO’s FX Strategists, Greg Anderson and Stephen Gallo, offer perspectives from strategy, sales and trading on the foreign exchange market, related financial markets, and the global economy.

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Greg Anderson:

Hi, welcome to episode two of Global Exchanges, a podcast about foreign exchange markets and related issues. I'm Greg Anderson. I will be joined by my cohost Stephen Gallo in this episode. Together, we will discuss the recent dip below 1.50 in the Euro-Canada exchange rate and the fundamentals that seem to be driving it. We will also give our views on this week's Bank of Canada and ECB meetings. The title of this episode is Euro-Canada at 1.50 and is still normalizing.

Stephen Gallo:

Hi, I'm Stephen Gallo, a London-based FX strategist. Welcome to Global Exchanges presented by BMO Capital Markets.

Greg Anderson:

Hi, I'm Greg Anderson, a New York-based FX strategist I'm Stephen's cohost.

Stephen Gallo:

In each weekly podcast. Like today's, we discuss our perspectives on the global economy and the foreign exchange market. We also bring in guests from the FX industry and from related financial markets like Commodities.

Greg Anderson:

We strive to make this show as interactive as possible. So, don't hesitate to reach out by going to BMOCM.com/globalexchanges. Thanks for joining us.

Female Announcer:

The views expressed here are those of the participants and not those of BMO Capital Market, its affiliates, or subsidiaries.

Greg Anderson:

Stephen, here we are on Tuesday, March 9th. What are you looking at? The currencies that you cover, from your neck of the woods in London?

Stephen Gallo:

I think the most important thing in my vicinity, Greg, is the fact that the Euro is lower. It hasn't been recently performing as a safe haven. Importantly, we've seen all of this volatility in interest rates and bond markets. We touched upon this briefly in the last podcast.

Stephen Gallo:

We know that on Thursday of last week, Powell had the opportunity to come in and sooth the bond market. He didn't take it. Equities fell, commodities fell, and also the Euro fell. I think those are the main things of interest in my vicinity. How about your vicinity, Greg?

Greg Anderson:

Stephen, I'm glad you brought up that little mini bout of risk aversion. Actually, it wasn't that small for a couple of currencies that I cover; the Australian dollar in Mex peso. However, it has seemed much more like just a blip for the Canadian dollar. So to me, what's interesting is CAD out-performance relative to peers, since Powell spoke.

Stephen Gallo:

Greg, let's try and therefore build some bridges here and put everything together. I think if you take my comments and your comments and you join them up, what you end up with is this fact that there's been this pretty interesting move in Euro-CAD. In fact, if you look at it in percentage change, it's down about 2% since Powell spoke last Thursday, which is a reasonably big move.

Stephen Gallo:

But, I think what also stands out is you wouldn't normally associate a move lower in Euro-CAD with risk aversion. Think about how Euro-CAD behaved in 2000. This time last year, equity markets were in free fall, commodities were falling, and Euro CAD was rallying. But now, despite what Powell didn't say, Euro-CAD is lower.

Greg Anderson:

Stephen, you noted a 2% move. What accentuates that is that the move took us down through 1.50, the figure, earlier this morning. We haven't seen that key sale at the logical level in almost exactly one year. Not since the 5th of March, 2020. It's like we come full circle on the pandemic response. So Stephen, to what do you attribute the normalization we've seen in Euro-CAD?

Stephen Gallo:

Well, that's a great question, Greg. I think one of the first things I would point to is relative expectations for central bank policy. In other words, slightly less dovishness coming out of North America and a bit more dovishness or prolonged easing coming out of the Euro zone. We've also seen that behavior of relative expectations play out in relative interest rates. That's pretty clear, but we've also seen divergence in economic data as well, and that has probably fed the central bank story for the two currencies in question.

Stephen Gallo:

I also think the vaccine rollout in the European Union is forcing questions to be raised about the extent of any snapback and growth in the European Union in Q2. Those are the main things I would cite from my vicinity. What about your side of the coin, Greg? What do you think are the key drivers from your perception?

Greg Anderson:

Stephen, I think the other issue is oil. Canada has less of an oil exporter than it was five years ago, but it's still an exporter. The Euro zone is an oil importer, of course. The WTI grade of crude has normalized back to the 60-65 dollar a barrel range where it was prior to the pandemic. The WCS grade produce in Alberta has actually gone one step further. It was in the 35-40 dollars a barrel range pre-pandemic. Now, it's around $50 a barrel.

Greg Anderson:

We're only beginning to see this show up in the trade data, but January's Canadian trade data showed Canada running a trade surplus. This will probably become the new norm, if oil stays at $50 a barrel for WCS. Flipping from a trade deficit to a surplus is a big story. Throwing it back to you. Stephen, do you see this week's ECB meeting as much of a potential story?

Stephen Gallo:

Well, I don't think the event risk for the ECB for this week is that big, Greg. I think if I had to judge, the ECB will probably play it cool for the time being, that would be my, my judgment. I don't want to overplay the inflation issue, but since you referred to it with the oil price factor, inflation is starting to show up in the pipeline through energy and intermediate goods. That's one thing.

Stephen Gallo:

The other thing, probably even more importantly, is the Euro is showing less pressure to appreciate. That's the first area. And then on the subject of yields and yield curve control, because there's a lot of focus right now about the backup and longer term yields. I think implementing a yield curve control target, or a cap when the ammunition you have to defend that cap is not infinite. I think it's difficult, particularly when bond market volatility is as high as it has been recently.

Stephen Gallo:

So, on this issue, I think, probably, if I had to judge the ECB preferences to be less than fully transparent. In other words, they're going to dynamically adjust their bond purchases without giving a precise target for yields, at this time. That doesn't mean that we can rule out yield curve control from the ECB altogether. But in terms of the timing, they may decide to wait beyond this week.

Greg Anderson:

Stephen, in terms of the ECB's monetary policy stance, you're expecting no changes on Thursday?

Stephen Gallo:

That's right, Greg. I think no official change in the policy stance this week to the interest rate or the stock of QE. Although, I do expect, on balance, the rhetoric on the economic outlook to be fairly dovish from the ECB. That leaves me to ask you, Greg, what about the Bank of Canada? What are you looking for from them?

Greg Anderson:

I would expect no change in the Bank of Canada's interest rate or balance sheet policies at this meeting. It's not an NPR meeting, so there are no forecasts to update. There's no press conference either. In the announcement, they will probably have to acknowledge that economic data has been relatively positive, but I think they will try to downplay that, so as to avoid further Canadian dollar appreciation. Looking past this week, Stephen, what do you think on ECB policy for the remainder of the year?

Stephen Gallo:

What you said about the Bank of Canada makes a lot of sense, Greg. I think from my perspective, the ECB will attempt to do the same thing it did in the last cycle. It's going to try to lag any signs of normalization from other major central banks. I think the key for the ECB though, will be to watch the extent of the Q2 economic balance. Depending on how that balance materializes or if it materializes, decide what it's going to do with the asset purchase program or perhaps an explicit target for yields after the situation for Q2 becomes clearer.

Stephen Gallo:

I also think that the ECB will probably want to stay out of the spotlight of the German election cycle, which really kicks off over the summer. Q2 is going to be a key moment for the ECB, I think, Greg. What do you think about the BOC from your perspective?

Greg Anderson:

Stephen, right now, I wouldn't expect any rate hikes through the remainder of the year or even hints thereof. However, as much as they don't want to. I think the BOC will end up tapering QE first. I think they will hang back probably until about July or so, hoping that the FED will also taper QE and end up at that point having to go it alone, so to speak.

Greg Anderson:

That is a CAD-positive factor that I think comes into play in the second half of the year. Perhaps, that is the issue that gets Euro-CAD all the way down to 1.45 or so, where it was before the pandemic began.

Stephen Gallo:

All fair points, Greg. I think that's a good point to end the podcast on. I think we'll wrap it up here, until our next podcast in a week's time.

Greg Anderson:

Thanks for listening to Global Exchanges. Listen to past episodes and find transcripts at bmocm.com/globalexchanges.

Stephen Gallo:

We'd love to hear what you thought of today's episode. You can send us an email or reach out to us on Bloomberg. You can listen to this show and subscribe on Apple Podcasts, Spotify, or your favorite podcast provider.

Greg Anderson:

This show and resources are supported by our team, here at BMO, including the FIC Macro Strategy group and BMO's marketing team. This show is produced and edited by Puddle Creative.

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Greg Anderson Chef mondial, Stratégie de change
Stephen Gallo Chef de la stratégie de change pour l’Europe



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