Canadian bonds mixed after Poloz’s comments

The Canadian government bonds were trading mixed on Tuesday after Bank of Canada (BoC) Governor Poloz spoke about global trade. Also, investors pay close attention to the next weeks FOMC meeting and Federal Reserve Chair Janet Yellen speech in an attempt to estimate the Fed's likely next step to raise interest rate. The yield on the benchmark 10-year bonds, which moves inversely to its price, moved higher 0.91 pct to 1.559 pct and the yield on the 2-year bonds dipped 1 pct to 0.692 pct by 1305 GMT.

The Bank of Canada’s Governor Poloz said that post-crisis global economy still faces severe headwinds and low interest rates are keeping headwinds at bay. Said trade slowdown should reverse as global economy recovers and pace of integration slower, trade at new balance point. Said troubling number of protectionist policies since the crisis and about half of trade slowdown linked to lower investment. If rates suddenly returned to 3-4 pct, a recession would occur, he added.

The U.S. Federal Reserve policymakers meet on April 26-27 and markets largely expect that interest rates will be kept steady with a slim possibility of a surprise hike. Focus will be on the press statement and whether there is a shift across the Fed members to a more hawkish stance.  Even subtle changes in the wording of its statement will tell us a lot about the probability of a June hike. Recent comments have been far more hawkish than the market is currently pricing in on rates.

On Friday, the Canada’s March Consumer Price Index (CPI) rose 1.3 pct y/y, against market expectation of 1.2 pct y/y, from 1.4 pct y/y in February. On monthly basis, it rose 0.6 pct, against market expectation of 0.5 pct. Core CPI rose 2.1% y/y, higher than the market consensus 1.7 pct, prior core CPI 1.9 pct. On the other hand, investors did not react to the weak February retail sales figure, which rose 0.4 pct m/m, against market expectation of 0.8 pct m/m, from 2.0 pct in January.

The Canadian bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of Canada's target. Today, crude oil prices rose by tracking weak greenback and stream on fresh liquidity into the market. Meanwhile, Crude oil prices continue to rover around 5-month high. The International benchmark Brent futures rose 1.58 pct to $45.02 and West Texas Intermediate (WTI) climbed 0.96 pct to $43.05 by 1250 GMT.

"We do not think the BoC is about to cut interest rates further; instead we expect it to await further developments on the oil price and see what impact this has on the Canadian economy.  We expect the BoC to increase interest rates for the first time in summer 2017." notes Commerzbank in a report.

Moreover, markets will now look forward to February GDP on Friday (1230 GMT). The investors will also look forward to next week’s FOMC meeting on Wednesday, 27th April.