By Michael O’Neill
Molly’s Game is the story (or Hollywood’s version) of a woman who ran a high-stakes poker game for a decade, attracting A-list movie stars, pro-athletes and business executives. It a 2018 Oscar nominee for “Best Adaptive Screenplay.”
“Powell’s Game” is a much bigger deal but doesn’t attract the glitz and glamour of a Hollywood production. The new Chair of the Federal Reserve won’t win any Oscars for his performance in front of Congress on February 27, but US dollar bulls were singing his praises.
The US dollar soared during the Q and A portion of his testimony and extended those gains in the following days. Traders believed that when Mr Powell said he had seen some data that added “confidence” to his view that inflation is moving up to target, it meant four rate increases in 2018, not three.
Mr Powell’s second day of testimony, this time to the House Financial Services Committee, on March 1, didn’t have the same drama. Part of the reason was that his opening remarks were identical to the previous session. He failed to reinforce Tuesday’s hawkish “sound bites” and actually “muddied the waters” by stating that he doesn’t see strong evidence of wage inflation. That triggered a bout of profit-taking led by a rally in EURUSD.
Still, the damage is done. Financial markets are expecting the March 21 FOMC dot-plot to reflect four rate increases. February ISM Manufacturing PMI recorded a post-recession high of 60.8, well above the forecasts for a gain of 58.7. That’s the kind of data that add’s confidence to Mr Powell’s higher inflation outlook.
In the Eurozone, European Central Bank (ECB) President Mario Draghi is singing a completely different tune. If The Fed Chair is a rock and roller, the ECB president is a balladeer.
This week, Mr Draghi acknowledged to the European Parliament that the “economic situation is improving” but insisted “uncertainties continue to prevail.” He was unhappy about recent FX market volatility saying; if it increases it could cause “unwanted tightening.” The next ECB meeting is March 8, but it may be too early for the Executive Committee to adjust their guidance.
These events have put the Canadian dollar in a downdraft. It was the worst performing currency among the G10 majors in February, losing 4.5%. The move accelerated on February 28 after markets decided that Fed Chair Powell was more hawkish than Janet Yellen and likely to raise interest rates at a faster pace than what was previously thought. The subsequent widening of CAD/US interest rate differentials combined with forecasts for a slowing Canadian economy and lower commodity prices fueled USDCAD gains. Nafta negotiation worries and the risk that the deal gets shredded are a wild card.
The Bank of Canada policy meeting is on March 7. Governor Stephen Poloz executed a dovish rate hike in January when he mentioned concerns about the NAFTA negotiations. What will he do next week? How will he balance shaky equity markets slumping commodity prices, and the Loonie on the verge of falling off a cliff?
NAFTA is still a factor. President Trump who earlier expressed a desire to “terminate NAFTA,” was at it again this week. He accused Canada of having an economic advantage over the US, because of the current agreement. Canada’s demand to include gender and indigenous rights while protecting Canadian supply-management systems ensures a high risk that Trump scraps NAFTA.
The robust domestic economy of Q4 2017 is a thing of the past. The BoC and other economists expect domestic growth to slow with uncertainty around NAFTA dampening investment enthusiasm. The last employment report showed the Canadian economy losing 88,000 jobs. Sure, they were all part-time and seasonal factors played a role. But so did minimum wage increases in Ontario.
Recent economic reports have been on the soft side. The Markit Manufacturing PMI report released March 1 was 55.6, below January’s 55.9 level. Statistic’s Canada’s annual Capital Expenditure Survey was released at the end of February. The survey suggests subdued business investment 2018, according to Bank of Montreal economists. The bump in Canadian inflation, attributed to the rise in minimum wage suggests domestic inflation is still stagnant.
This Bank of Canada meeting may have limited impact on the currency and markets in general and that would be deliberate. There are too many uncertainties both domestic and international, which may motivate the Bank to keep their cautious approach to “future policy adjustments.” If so, they will be more than willing to sit on the sidelines to see what The FOMC does on March 21.
It is Powell’s game now, and at the moment, the biggest pile of chips is in front of his seat.