Is it just some Holla Dolla or a new phase of King Dollar and why?

The last few days have brought an ongoing topic to the fore and Holla Dolla refers to another strong period for the US Dollar. This morning it has been illustrated in a couple of ways as for example the UK Pound £ has nudged below US $1.29 and the Australian Dollar is nearing (0.7008) passing 0.7.


If we stay in a land down under for a moment we see abc news reporting this.

At 7:10am, the dollar was buying 70.1 US cents.

It was a significant drop from its value on Good Friday (71.5 US cents).

The currency’s sell-off was sparked by yesterday’s weak consumer price index (CPI) — with the figures revealing that core inflation ( at 1.4pc) had drifted to its lowest level in at least 16 years.

This looks the beginnings of another success for my leading indicator which I highlighted on the second of this month.

If we look ahead and use the narrow money measures that have proved to be such a good indicator elsewhere we see that the narrow money measure M1 actually fell in the period December to February. If we switch to the seasonally adjusted series we see that growth faded and went such that the recent peak last August of Aussie $ 357.1 billion was replaced by Aussie $356.1 billion in February so we are seeing actual falls on both nominal and real terms.

It would appear that according to abc others are if belatedly, keen to join our theme.

These latest developments have led to analysts from Australia’s major banks upgrading their rate cut expectations.

“The downward surprise to core inflation in the first quarter leaves the RBA with little choice but to cut the cash rate by 25 basis points at its May meeting,” ANZ economists Hayden Dimes and David Plank wrote in a note.

They also both expected a second rate cut to happen in August.

Or if we return to Men At Work.

I come from a land down under
Where beer does flow and men chunder
Can’t you hear, can’t you hear the thunder?
You better run, you better take cover, yeah

As a technical note yet again we see a central bank responding to events rather than getting ahead of them. Whatever happened to aiming at something 18/24 months ahead? Or to put it another way forward guidance has been anything but.


If we stay with customers of the Type 26 frigate programme then there was this yesterday from the Bank of Canada.

Given all of these developments, Governing Council judges that an accommodative policy interest rate continues to be warranted.

Which replaced this in January.

Weighing all of these factors, Governing Council continues to judge that the policy interest rate will need to rise over time into a neutral range to achieve the inflation target.

Depending on how you look at this they have either capitulated or adjusted to reality, albeit just like Australia they find themselves chasing events rather than anticipating them as reflected below.

In Canada, growth during the first half of 2019 is now expected to be slower than was anticipated in January.

Along the way we saw yet another bad afternoon for supporters of output gap theory and the concept of neutral interest-rates. Both were adjusted to suit the new outlook meaning they are fitted to the decisions taken rather than being part of any scientific process.

The combination of these factors led to the Financial Post reporting this.

The value of the Canadian dollar dropped by nearly a penny to roughly 74 U.S. cents, as traders repriced financial assets to match a prolonged period of low borrowing costs.

It remains there as I type this leaving it around 5% lower than a year ago which again reminds us of dollar strength as it was only a couple of days ago we were noting that the Loonie had been boosted by the higher price of crude oil.


I am not sure who could possibly have thought that the Bank of Japan had any intention of raising interest-rates. But if you did you were disappointed this morning.

The Bank intends to maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, at least through around spring 2020, taking
into account uncertainties regarding economic activity and prices including developments in overseas economies and the effects of the scheduled consumption tax hike.

The Yen is difficult to read this year after what happened on January 3rd with its flash rally.

We cannot rule out that this was deliberate and please note the Yen low versus the US Dollar was 104.9 as you read the tweet below.

Japanese exporters had bought a lot of usd/jpy puts at year end with 105 KOs so now they are really screwed … ( @fxmacro )

So it is a case of watch this space.


This has been in a downtrend against the US Dollar for a while now. The 1.115 of this morning has replaced the 1.21 of a year ago. The last week or so has seen something of an acceleration of this trend which has been driven by various factors. The economic slow down in the Euro area has been mostly in an exporting sector with manufacturing and particularly car production under pressure. This has led to more expectations of further easing from the European Central Bank. As interest-rates are already negative (-0.4%) this may be in other areas and this is why we have seen the ten-year yield in Germany go negative again (-0.01% today). Although interest-rate futures have risen a bit too ( this suggests lower interest-rates) although they always suffer from vertigo when they go above 100 as they were never supposed too!

Maybe the shenanigans around Deutsche Bank have not helped either as the merger with Commerzbank appears to be off. Which as it share price is a mere 7.67 Euros does not leave Deutsche Bank with a lot of options.


There has been an elephant in today’s room which is that since the middle of December we have noted a change in US interest-rate policy as we wonder if Rod Stewart was on the money.

The first cut is the deepest
Baby I know the first cut is the deepest

What I think has been happening is that the change in US policy has reminded traders of two things. You can get 2.5% in the US right now via the official rate and the ten-year Treasury Note which is better than elsewhere. These days Canada (1.75%) and Australia (1.5%) are relatively high interest-rate countries however odd typing that feels. Also the US depends on external trade relatively less than other countries as this from the morning hints at.

KOREA: GDP -0.3% in 1Q v +0.3% est. Shrank most in a decade. ( @fiatcurrency)

God knows who did the forecasts there as they must have been wearing blinkers.

Next we can return to our topic of Tuesday as the higher crude oil price ( now US $75 for Brent) impacts other countries who have to exchange their currency for dollars to buy it.

So let me sum up the trend with a quiz I posted yesterday on Twitter.

Me on The Investing Channel


Why is Canada even discussing negative interest-rates?

Yesterday there was quite a development in Toronto where Stephen Poloz the Governor of the Bank of Canada was speaking. Let me quote his words.

The fourth unconventional monetary policy tool I want to cover is negative interest rates, which is something you have heard a lot more about recently.

Not only recently Stephen as I have been discussing them on here since 2010! However the Bank of Canada does have a track record in this area so please join me in a trip in the TARDIS of Dr. Who back to April 2009 and the emphasis is mine.

On 21 April, the Bank lowered its target for the overnight rate by one-quarter of a percentage point to 1/4 per cent, which the Bank judges to be the effective lower bound for that rate.

We have been noting over the last 18 months or so that the “lower bound” has been slip sliding away especially as we note that every country which has implemented negative interest-rates has then cut them further. However there was a reason that the Bank of Canada thought that they were a bad idea in 2009.

In principle, the Bank could lower the policy rate to zero. However, that would eliminate the incentive for lenders and borrowers to transact in markets, especially in the repo market.

So if we translate that into ordinary persons English we see that like the Bank of England they were concerned about what zero interest-rates would do to the banking sector. It is always the banks for them isn’t it? Oh and the man signing off that report was called Mark Carney, whatever happened to him?

What about now?

A paper by two Bank of Canada economists ( Jonathan Witmer and Jing Yang) takes up the story.

Our best estimate for the effective lower bound is a target rate of around -50 basis points (bps).

So what has happened in the intervening six years or so which has changed their mind?

Since investors must pay to store large amounts of cash, the effective yield on cash is actually negative…..Cash storage costs, including direct costs of storage and insurance costs, are approximately equivalent to 25 to 50 bps per year.

I do like “must pay” as of course there is a choice which they miss. In reality there is a variety of choices where an ordinary person stuffing cash into either a literal or metaphorical mattress may consider the cost to be zero, or a drug dealer who will have very heavy costs laundering his cash.

But the fundamental issue here is that none of this has changed in the past six years so why has the Bank of Canada?

The absence of abnormal cash demand in Switzerland, for example, with the target rate at -75 bps, supports this possibility.

Ah okay so they now think that they can get away with it without unduly harming the banking sector! Also I note that something we have discussed on here many times has been noted.

In addition, many banks have not passed on the rate cut to mortgages.  This may be due in part to the banks’ desire to protect their interest rate margin.

So the central banks worried that negative interest-rates would hurt banks but now they discover they pass on the problem in the form of a rugby hospital pass and hurt the consumer their worries disappear. Ouch! Talk about revealing their motivation.

This reminds me of the biggest Sham 69 hit where you need to replace kids with banks.

If the kids are united then we’ll never be divided
If the kids are united then we’ll never be divided

If this was another industry failing to respond to downward price pressures by in effect forming a cartel would lead to investigation and prosecution but apparently different rules apply to banks.

We do get a burst of genuine honesty towards the end of the paper.

We do not know where exactly the ELB for the Bank of Canada policy rate is, nor do we know how long policy rates could stay negative.

But also in case we missed it a reminder of the “by the banks for the banks theme” and the emphasis is mine.

In such an environment, they should monitor the effect of negative rates on core funding markets, banks and other market participants.

Oh and you might have thought that the real economy might have got a mention at least somewhere…..

Forward Guidance

There are various issues here but Governor Poloz is either unaware of deliberately ignores the problem of proclaiming Forward Guidance and also telling people this.

This suggests that we have more room to manoeuvre in response to adverse shocks than we believed back in 2009.

So they were wrong about a basic point when giving Forward Guidance back then. Also in a world where confidence is fragile there is the issue of whether making such statements is damaging in itself. The human psyche can be mysterious and unpredictable and the same critique was applied to the former Bank of England Governor Baron King of Lothbury who was invariably downbeat.

Will people worry about the downbeat implications and be afraid be very afraid or concentrate on this.

In the Bank’s last Monetary Policy Report (MPR) in October, we forecast that the Canadian economy would return to positive growth in the second half of this year, and that annual growth would continue to increase in 2016 and 2017…..Canada’s outlook is encouraging.

So the future is so bright we are considering negative interest-rates in response to it? Even Governor Poloz can spot the flaw.

Given this outlook, it may seem like an odd time to be updating our unconventional monetary policy tool kit.

Mark Carney and the lower bound

The lower bound has been a very troubled area for the Bank of England Governor. Yesterday saw his Forward Guidance of 0.25% become -0.5% in Canada. Even worse for him he actually raised his estimate of the lower bound in the UK to 0.5%! Up was the new down for him and his behaviour was even odder because he did this as places in Europe were heading into negative interest-rate territory. He is lost in his own land of confusion on this subject.


The issue of the spread and indeed contagion of negative interest-rates is one that makes appearances in what might seem unexpected places. If pressed about this week I would have guessed Sweden,Denmark or Switzerland would be making the headlines. Also Canada had for a long time a relatively good credit crunch as the commodity price boom meant the problems seen elsewhere were underwritten. Along the way we saw “Peak Carney” as the UK establishment were seduced by such events and he saw a chance for personal improvement.

However now for all the rhetoric there are plainly issues as we note an oil price where the Brent Crude has tested US $40 more than once already this week. In addition the Bloomberg Commodity Index hit a low for this century. This led Governor Poloz to mull on these possibilities.

commodity prices could fall further as new supply weighs on prices…….even as the resource sector contends with lower prices.

We do not know what will happen next but we do know that it recent days the resource sector has seen even lower prices. A Black Swan for the previously serene Canada?

As we stand the situation remains relatively serene as the last GDP report showed annual growth of 2.3% albeit with a 0.5% fall in September. However  employment has dipped in the last 2 months as we wonder if Canada can continue to escape the pain that others have suffered in the credit crunch era? The currency has certainly got the message. From the Financial Times.

Loonie touches 11-year low