Global Monetary Policy 'Loose as a Goose' - Volatility Forecast for EUR CAD NZD AUD

January 22, 2015 - Written by John Cameron

STORY LINK Global Monetary Policy 'Loose as a Goose' - Volatility Forecast for EUR CAD NZD AUD

The Bank of Canada (BoC) caught investors firmly on the back foot during yesterday’s session by announcing a surprise interest rate cut. Analysts had not predicted the 25 basis point downward shift in the BoC’s cost of borrowing, so the move saw the Canadian Dollar heavily sold off during the middle part of the North American session.

Matt Weller of Gain Capital explained that, ‘that is a massive surprise and Dollar-CAD is already surging. We anticipated some dovish rhetoric, but not any actual action from the Bank of Canada, so I think this cut here may be reflecting the weakness in oil prices.’

The Pound Sterling Canadian Dollar exchange rate spiked above the 1.8500 GBP CAD for the first time since mid-March late yesterday as market participants prices-in the change in policy direction from the BoC. Canada’s central bank has adopted a generally neutral tone in its rhetoric since Stephen Poloz took over as Governor from Mark Carney a couple of summers back. The dramatic ditching of this stance yesterday appears to form part of a bigger picture.

At the end of last year, prior to the sharp drop-off in wholesale oil prices, commentators had been tripping over themselves to forecast that several major global central banks would be hiking their interest rates during the first two quarters of 2015. Major shifts in the world’s markets since this time have changed investors’ mindsets and most analysts now predict that several leading central banks are going to go down a more dovish path this year.

Yesterday’s Bank of England minutes revealed that all nine member’s of its monetary policy committee are now against a rate increase, while the Reserve Bank of Australia has been touting a potential rate cut during recent weeks. The Reserve Bank of India trimmed its key lending rate to 7.75% earlier this month, but the European Central Bank remains the ‘biggie’. Analysts predict that the euroland’s reserve bank will announce a €50bn per month Quantitative Easing programme later today; commentators forecast that this may propel the pound Sterling euro exchange rate all the way to the 1.4000 GBP EUR threshold sooner rather than later.

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