Big USD/CDN volatility as divergence of Fed and BoC monetary policies reaching crisis levels

Canada’s high interest rate policies, a feature of a country that traditionally has been a massive net importer of capital, are being put to the test after a divisive national election that more than ever have highlighted the fractious regional political relations that historically have threatened the Canadian federal bargain.

The difficulty of the job of walking the Bank of Canada’s (BoC) high interest rate, high wire act came into stark relief on Friday when in an unusual move BoC Governor Stephen Poloz said he would not seek a second seven-year term, opening the door for Deputy Governor Carolyn Wilkins, who if confirmed by parliament would be the nation’s first female BoC governor.

Interest rate high wire act

The Poloz announcement came on Friday after Statistics Canada announced that Canada’s jobs market has been decimated in the last two months, with November seeing a huge loss of over 70,000 jobs, the largest monthly decline in ten years. The Canada jobs news was in stark contrast to the US, where there was a huge, surprise 266K jump in “non-farm payrolls.”

There is big uncertainty about the next BoC rate move. The BoC quite controversially left rates unchanged last week, with the official Bank Rate still at 1.75%, a big pickup from the US Fed Funds Rate which the US Federal Reserve (Fed) has been cutting all year and stands at 1.5%. The BoC in contrast has left rates pat since April, creating a wide interest rate spread needed for Canada's big capital imports.

Big volatility

USD/Cdn was massively volatile late in the week as some in the market thought Poloz might relent and lower rates, especially in view of one of the worst jobs data reports in recent Canadian history. Daily 100+ pip moves in the last two trading sessions reflected wildly gyrating interest rate expectations.

The BoC failure to ease was bound to infuriate politicians in the western provinces, especially in the province of Alberta, which is experiencing a mild recession driven by climate opposition to pipelines designed to unlock the riches of Alberta’s giant Tar Sands oil deposits.

Owes nothing

Prime Minister Justin Trudeau has vowed to plow through opposition to the pipelines, but in fact Trudeau owes the western provinces other than BC pretty much zero, his Liberals failing to win a single parliamentary seat west of Ontario in the latest election.