North American: The United States
“What we’re seeing now is an economy that seems to be at an inflection point….we feel like we are at a point where the economy is about to start growing much more quickly, and job creation coming in much more quickly…we see strong growth and strong job creation starting right now. So, the outlook has brightened substantially…
I would say the growth we are expecting in the second half of this year is going to be very strong.”
Federal Reserve Chairman Jerome Powell on 60 Minutes, April 11, 2021
Federal Reserve Chair Jerome Powell made headlines when he boldly declared his bullishness on the American economic recovery. Financial markets displayed muted responses. The S&P 500 (SPY) is up just 1.3% since that 60 Minutes interview. Bond yields stopped rising ahead of Powell’s appearance, and they are actually down since. For example, TLT is up 1.8% over this time. Still, Powell’s message shines a bright spotlight on the market action. Even with market breadth narrowing, buyers have every excuse to buy dips in the latest rotation to the flavor of the week.
North American: Canada
Meanwhile, to the north, the Bank of Canada completed the North American alliance of bullish central banks with a glowing report from Governor Tiff Macklem. On April 21st, the Bank issued its latest statement on monetary policy. From the opening statement:
“…we are expecting strong consumption-led growth in the second half of this year. Fiscal stimulus from the federal and provincial governments will also make an important contribution to growth. Strong growth in foreign demand and higher commodity prices are expected to drive a solid rebound in exports and business investment, leading to a more broad-based recovery.”
The Bank of Canada backed up its bullishness with a substantial reduction in its quantitative easing (QE) program. The QE target for net purchases of Government of Canada bonds went from a minimum $4B (Canadian) to $3B. Ultra low Interest rates remained untouched. The Canadian dollar strengthened considerably with USD/CAD falling sharply off its pivot around a downtrending 50-day moving average (DMA).
Given the tightening relative to U.S. monetary policy, the Canadian dollar should show this renewed strength against the U.S. dollar.
A Hot Housing Market – in Canada
I took close interest in Macklem’s commentary on the soaring Canadian housing market. Canada’s housing market has close parallels with the bullish dynamics in the U.S. housing market; yet one more North American alliance of bullishness. Unlike in the U.S., the Canadian market is apparently hot enough to warrant regulatory action (emphasis mine):
“With so many households working and studying at home, we see many people wanting more living space. And interest rates have been unusually low, making borrowing more affordable. While the resulting house price increases are rooted in fundamentals, we are seeing some signs of extrapolative expectations and speculative behaviour.
Given elevated levels of household debt and the risks that households may overstretch in the face of rising housing prices, we welcome the recent proposal by the Superintendent of Financial Institutions to introduce a fixed floor to the minimum qualifying rate for uninsured mortgages. New measures just announced in the federal budget will also be helpful. We are watching developments in the housing market very closely…”
Macklem reemphasized his warnings about the housing market in the Q&A with members of the press. He noted that supply is not responding fast enough to demand. Accordingly, prices are increasing rapidly. Macklem fears home buyers may over-estimate the sustainability of these price increases, indeed expect prices to rise indefinitely. As a result, households are likely taking on too much risk. Macklem bluntly declared “that would be a mistake.” Rising loan to income ratios indicate that more and more households are over-stretching to buy a home. A proposal for a 1% tax on vacant homes is intended to tamp down speculation. (Macklem discusses housing market dynamics at the 28:00 and 37:00 marks in the video below).
The Trade
The recent monetary news solidified my bullishness on the Canadian dollar. Playing the downtrend in USD/CAD remains attractive. The U.S. dollar index as a whole is a tougher call. Last month, the U.S. dollar pulled off a dramatic but false 200DMA breakout (the blue line in the chart below). Sellers have pressured the U.S. dollar ever since. The decline in interest rates dampens the attractiveness of the U.S. dollar. If an inflation/reflation “scare/tantrum” picks up again, I expect the dollar to rise with interest rates.
Last week’s 50DMA breakdown puts the U.S. dollar right back into a bearish position. For now, I am fading this selling with a short EUR/USD position. Including USD/CAD, I am swinging through dollar short positions in all other currency pairs.
Be careful out there!
Full disclosure: long and short U.S. dollar currency pairs