Starting with this June, Bank of Canada (BOC) has a new Governor – Tiff Macklem. For the seven years term, he will be responsible for most of the BOC monetary policy decisions.
This is not a particularly good time to arrive at the helm of a central bank, especially one like BOC. Due to the strong links with the commodity markets (i.e., the price of oil), BOC always had a tougher job to fulfill its mandate of price stability.
Macklem’s First Testimony Created Volatility on the CAD Pairs
Yesterday it was the first time when the new BOC Governor testified in front of the Senate Committee on National Finance. As always, traders are keen to find clues about what BOC will do next with the interest rate and, more particularly, how it is viewing the current easing monetary policy programs it is running.
BOC runs an inflation-targeting monetary policy, aiming for price stability around the 2% symmetrical level. That means, that when inflation threatens to come close to zero, BOC will lower the interest rate benchmark so that the monetary policy becomes accommodative. Naturally, the opposite happens when inflation rises above the 2% target.
The current inflation in Canada is 1.8% if we consider only the core components of it. Also called the Trim CPI, it excludes the effect of energy prices, most particularly, the changes in the price of oil. With those included, Canadian CPI is below zero – explaining the 0.25% interest rate for the Canadian Dollar, set by BOC.
Yesterday’s testimony sent the CAD higher across the board. In response to the coronavirus pandemic, BOC took unprecedented monetary policy measures, moving the policy into uncharted territory. With the interest rate already at the lower boundary, it had no choice but to follow on other central banks’ footsteps – starting large-scale asset purchasing.
So, why did the Canadian Dollar rise? Just like the ECB’s June press conference, when further easing measures sent the Euro higher, the market interpreted the willingness of the BOC to do whatever it takes to tackle higher unemployment and low inflation as a hawkish message, one of confidence in the ability of the bank to reach its mandate. Investors bought the CAD against EUR, GBP, USD, AUD, as all the pairs closed lower on the day.
It is too early to say anything about the way Macklem will lead the Bank of Canada. But we can all agree he will not have an easy time.