OTTAWA/TORONTO (Reuters) - The Bank of Canada’s journey from dove to hawk and back again this year has sent the currency market on a wild ride and put pressure on the central bank to provide better direction, despite eschewing its forward guidance policy years ago.
The Canadian dollar CAD=D4 has swung from a 13-month low of C$1.3800 in May to a two-year high of C$1.2063 in September, before reversing course again this week, all in concert with shifts in tone from the bank and its uncertain monetary policy path.
The bank reiterated Wednesday that the outlook for interest rates is data dependent. But greater clarity on the direction and speed at which it expects to move rates could help reduce volatility in the Canadian dollar and allow end users to better manage their exposure to the currency.
“We try to hedge and we try to plan. And the volatility that (came from) the way they acted, it’s impossible to plan,” said Alain Côté, executive vice-president at Genetec Inc, an exporter of video surveillance systems with Canadian expenses and U.S. sales.
After back-to-back rate hikes in July and September, Governor Stephen Poloz signaled this week a third rate hike is not imminent, reversing recent Canadian dollar strength and once again rewriting analyst expectations for future moves.[L2N1M81BT]
That sliced 1 percent from the Canadian dollar, the largest one-day drop by the currency since January, when Poloz said a rate cut was still on the table.
“Part of these (market moves) are knee-jerk reactions; they say one thing with one tone on one day and then they say another thing with another tone on another day,” said Rahim Madhavji, president of Knightsbridge Foreign Exchange.
“There definitely could be better communication.”
The current signal to focus on data means rate decisions may be made at the last minute, based on the most recent economic data.
By contrast, the Federal Reserve said the path of U.S. interest rates would be higher and gradual, allowing the market to price in a restrained pace of Fed rate hikes and balance-sheet reduction.
“The market has accepted that the Fed is hiking rates ... We haven’t seen the knee-jerk reaction we’ve seen in Canada this year,” said Jimmy Jean, senior economist at Desjardins Capital Markets.
“The problem we are dealing with here is Poloz’s views on the matter of providing guidance. We know he is not too fond of that,” Jean added.
Poloz abandoned forward guidance in 2014 in a bid to create less volatility, saying the policy of an explicit tightening or easing bias should be reserved for extraordinary times.
But by removing the proactive option, the bank has shifted to a reactive stance, with both Poloz and Deputy Governor Tim Lane coming out to talk down the Canadian dollar in recent weeks after the currency’s strength put growth at risk.
For exporter Cote, who said he lost millions of dollars “in 10 minutes” after September’s surprise hike, a smoother ride is the goal.
“If there is a way to avoid that kind of whipsaw, that kind of gyration in the future, that would be certainly appreciated by me and the likes of me.”
Reporting by Andrea Hopkins in Ottawa and Fergal Smith in Toronto; Editing by James Dalgleish