CAD Suffers as BOC Defer QE Taper, FTSE Wilts at Higher Taxes

BOC still on track to tighten policy

The Bank of Canada (BOC) held interest rates at 0.25% as widely expected, which has been its record low since March 2020. They also kept their bond purchases at $CA $2 billion per week, having trimmed them from $3 billion in July’s meeting. The Canadian dollar was broadly weaker against its peers following the meeting which saw USD/CAD hit a 8-day high around 1.2700 and CAD/JPY fell -0.4% and stopped near its 200-day EMA. NZD/CAD rose to a near 5-month high as it remains increasingly likely that RBNZ will be the first major central bank to raise interest rates. Yet perhaps the Canadian dollar is becoming oversold as BOC remain the 2^nd mostly likely central bank to tighten policy.

We continue to suspect tapering is just around the corner for BOC and may even be announced at their October meeting, given the overall optimism in the summary of their meeting.

Note from the summary of the meeting:

• Rates held at 0.25% and QE maintained at $2 billion per week
• Supply chain disruptions are restraining activity in some sectors across the globe
• GBP contracted in Q2 and was weaker than anticipated in July’s MPR (Monetary Policy Report).
• Consumption, business investment and government spending contributed positively to growth.
• Employment rebounded through June and July.
• BOC continue to expect the economy to strengthen in the 2^nd half of 2021
• Fourth wave of COVID continues to weigh on the recovery.

UK to tax their way out of debt

The FTSE 100 (UK100) came under pressure yesterday after the UK government unveiled a £12 billion tax rise to pay for the struggling health and social care sectors. British residents will now face a 1.25% rise on their National Insurance payments from April 2022, and will then become a separate tax on earned income from 2023. It has been called the highest tax raise in 40 years and met with anger from opposition parties and the general public. British lawmakers backed the reforms in a parliamentary vote on Wednesday.

Higher wages failing lure UK workers

Separately, a shortage of candidates for employers may be the worst on record in the UK. And this flies in the face of employers being very upbeat on the economy in August as the economy continued to thrive after reopening. A combination of factors have led to the skills shortage, such as candidates being reluctant to switch roles during the pandemic and fewer skilled European Union workers are available post-Brexit. And this has seen salary’s for new permanent staff members skyrocket as employers battle over the same, smaller pool of suitable candidates. And this could perhaps why similar issues in the US.

Employment remains key data for the Fed

JOLTS job openings hit a new record of 10.9 million in July, up 749k from June and rising for a 7^th consecutive month. This mean that job vacancies in July outpaced employment growth estimates in August for both ADP and NFP reports (which totalled just 609k combined). Later today we have the weekly initial claims data from the US. Both continual and initial claims are at 17-month lows and continue to be a beacon of hope for the economic recovery. So if we are to see them rise notably over the coming weak the markets will take notice, as it simply moves back any expectations for the Fed to tighten policy this year.