Traders say lack of Bank of Canada guidance fuels volatility
By Randall Palmer and Leah Schnurr
OTTAWA (Reuters) - When Bank of Canada Governor Stephen Poloz abandoned a policy of offering forward guidance on interest rates last year, he said telling traders explicitly what's going to happen can boost volatility as it spurs a rush for the exits when things change.
But traders say that so far the policy shift has in fact increased volatility with the central bank blindsiding markets with its surprise rate cut in January, and then catching them off guard again this week with comments by Poloz suggesting it will hold rates steady next month.
"How fast the market is flip-flopping around on interest rates in Canada has been quite remarkable," said Amo Sahota, director at Klarity FX in San Francisco.
When Poloz set out his reasons for eliminating forward guidance in a paper (bit.ly/1LQhJPC), he said one of his goals was "to shift some of the policy uncertainty from the central bank's plate back unto the market's plate".
By offering transparency on the economic risks the central bank is weighing, the idea is that markets will trade off new data and become "two-way and less vulnerable to unusual leveraging and volatile shifts".
Poloz reiterated on Tuesday that it is healthier for the central bank to lay out how it sees the economy and then let markets draw conclusions about rates.
Drawing such conclusions hasn't been easy for traders, partly because of what they perceive as the bank's mixed messages.
Just a week before the oil-price-driven rate cut in January, Deputy Governor Tim Lane said the plunge in crude prices would not have a drastic impact on growth in Canada, a major oil exporter. Continued...