Central Banks Remain on Hold
10/12/09 22:28
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Central Banks Remain on Hold
The relationship between USDCAD and oil, as oil has slid $9 since the beginning of December. We noticed that the correlation between USDCAD and oil has broken down recently and that USDCAD and USDJPY are the only G10 currencies to have positive near-term correlations with oil.
Oil and USDCAD have generally been well-correlated given energy's significant share in Canada's economy. But recently, USDCAD has bounced around between 1.0430 and 1.0750 in recent weeks and stayed in that range as oil dropped. Another way to look at the recent break down in correlation is over various periods. We looked at oil and G10 currency correlations over 270 days, 200 days, 90 days and 30 days and USDCAD, along with USDJPY, reverses in the shorter 30 day correlation.
Central Banks Remain on Hold
The relationship between USDCAD and oil, as oil has slid $9 since the beginning of December. We noticed that the correlation between USDCAD and oil has broken down recently and that USDCAD and USDJPY are the only G10 currencies to have positive near-term correlations with oil.
Oil and USDCAD have generally been well-correlated given energy's significant share in Canada's economy. But recently, USDCAD has bounced around between 1.0430 and 1.0750 in recent weeks and stayed in that range as oil dropped. Another way to look at the recent break down in correlation is over various periods. We looked at oil and G10 currency correlations over 270 days, 200 days, 90 days and 30 days and USDCAD, along with USDJPY, reverses in the shorter 30 day correlation.
It stands out that one of the commodity bloc currencies would break its correlation with oil. A possible explanation is that foreigners are still interested in Canadian assets not just because Canada could benefit from a boost in commodities from stabilizing global demand but because Canada is not beset with the fiscal, financial sector and political issues that other G10 countries seem to be facing. It could also help that the recent positive labour data in the US has raised the possibility that the negative effects of the US economy on Canada could start to recede.
In any event, while it could be encouraging that the CAD did not weaken significantly with oil, that same fact is probably concerning for Canadian officials. They continue to highlight that CAD strength could act as a brake on growth and the CAD's resilience in the face of a drop in oil will likely keep officials on guard.
CHF: SNB quits buying corporate bonds
As expected, the SNB kept rates on hold and will continue its currency intervention policy. The SNB also announced that the purchase of corporate bonds has now been stopped. A reduction of the outstanding volume is not to be expected in the near term. SNB's Jordan says intervention has been successful thus far and the SNB has spent some 40bn CHF on intervention since the policy began. Jordan also said the SNB cannot stabilize USDCHF with interventions and the focus remains on EURCHF but they will continue to buy dollars and euros and other currencies at the same time to have a high effect of interventions. UBS economists note that although the SNB has no intention of undoing unconventional measures, reserve provisions are being increased and this means the SNB has to be cautious in expanding their balance sheet going forward, which may also imply some more caution in interventions as currently they remain unsterilized.
BoE unchanged
The Bank of England kept the base rate at 0.5% and asset purchases at GBP200bln, in line with expectations. The accompanying statement said the program would take another 2 months and the size would be kept under review. UK monetary policy will likely be a non-event until the Inflation Report period next February.
Sterling has recovered somewhat after the rather negative headlines from the Pre-Budget Report, though ongoing uncertainty as gilt policy and pre-election politics become ever more intertwined may result in medium-term risks.
Source: UBS, Bloomberg