Forget the pound’s Carney-val, what about the Canadian dollar?
The shock announcement that Mark Carney, Bank of Canada (BoC) governor, is set to take the helm of the Bank of England (BoE) has boosted the pound, but don’t forget the Canadian dollar.
The initial reaction to Carney’s appointment – he leaves the BoC in June and takes over at the BoE in July – saw the pound trade higher. That might come as little surprise: he is, by common consent, a credible and respected central banker. The impression of Carney as highly competent central banker seemed to be the reaction to the news in the UK, where his arrival was hailed less in the manner of a new central bank chief and more in the manner a new star coach for England’s under-achieving football team.
From a currency perspective, Carney is seen as a hawk. After all, the BoC still has a mild tightening bias in place at a time when most other G10 central banks are easing or have an easing bias.
However, the situation is more nuanced.
As an in-depth – and recommended – analysis of Carney by our colleagues at Euromoney points out, Carney is pragmatic.
Against his enthusiasm for potential counter-cyclical, inflation-taming tightening in Canada now, it should be noted that Carney cut rates in Ottawa just a month after his appointment in March 2008 in a bid to stimulate activity.
Writing off further quantitative easing in the UK and assuming the BoC’s tightening bias will be exported across the Atlantic looks naive at best. History suggests Carney is not blindly hawkish and will adapt quickly, say, if UK economic conditions deteriorate markedly.
However, as the pound rallied on the news of Carney’s appointment, the Canadian dollar sold off.
Some say the identity of Carney’s successor at the BoC is crucial for the future progress of the Canadian dollar.
“Any hint that Carney’s replacement may adjust to a marginally less hawkish monetary approach – bearing in mind the recent softness in Canadian macro data – would leave the currency highly vulnerable as the rate factor has proven highly supportive for CAD over recent months,” says Audrey Childe-Freeman, head of currency research at Bank of Montreal.
However, others question whether the identity of the new BoC chief matters.
Camilla Sutton, chief currency strategist at Scotiabank, points out that no interest rate moves are priced into the market during the next 12 months, and it is unlikely that the BoC would need to cut interest rates.
Rate expectations are flat in Canada
|Source: Bloomberg, Scotiabank|
The knee-jerk sell-off in the Canadian dollar was, in other words, down to uncertainty over who will lead the BoC, not over the future direction of monetary policy.
That uncertainty is unlikely to prove a lasting driver of the currency if history is any guide. When David Dodge announced in April 2007 that he was not going to seek a second term as BoC governor, the Canadian dollar strengthened against its US counterpart after a brief bout of weakness, even as the bank’s board of directors took five months to name Carney as his successor.
USDCAD in Arpil 2007 after Dodge steps down
|Source: Bloomberg, Scotiabank|
Rather like the appointment of a new England football coach, Carney’s installation has provoked some initial excitement but, ultimately, long-term results look set to remain unaffected.