BOC: Unexpected Pol Statement Tone Can Have Signif Mkt Impact

--BOC Researchers Say Tone Can Significantly Impact CAD, Yields

By Yali N'Diaye

     OTTAWA (MNI) - The Bank of Canada's research staff looked at the initial

market response to the central bank's own policy statements to find that

unexpected changes in the tone can have a "considerable" impact on the Canadian

dollar and the 10-year government bond yield.

     "The tone of a statement is particularly relevant to the market when the

policy rate has been unchanged for some time," said a staff analytical note

titled "The Impacts of Monetary Policy Statements" published Friday.

     Not that this would be a surprise. But the staff went on to quantify such

impacts. 

     From 2006 to 2016, an unanticipated change in the tone of the statement can

move the 'loonie' by as much as 0.5 of a cent, which is "sizable" when comparing

to the average 1.25 cent change that an actual unexpected 25 basis point rate

move -- up or down -- can trigger.

     Bond markets also react in a "considerable" way to unexpected changes in

the policy statement tone, as the 10-year government bond yield can move by 2

basis points, compared to an average 7 basis points for an actual unexpected

rate hike or cut.

     The research identified a "level component" -- the change in the short-term

Canadian bankers' acceptance (BAX) rate immediately after the policy

announcement - and a "slope component" -- reflecting the additional change in

longer-term BAX rates.

     Noting "strong empirical evidence" that the slope component reflects

unexpected changes in the tone of the policy statement, the report said the

slope component and the level component together explain 60% of the Canadian

dollar variation within the 60 minutes following an announcement.

     In the case of the bond market, the two components explain 74% of the

10-year yield variation within 60 minutes of the announcement.

     Governor Stephen Poloz has been stressing the importance of data in making

one's judgement, urging markets to not hang on to the "bank's every word" and

instead focus on what the data are saying.

     However, who else has a better insight into the interpretation of data by

the BOC than the Governing Council itself, especially given the absence of

minutes -- unlike, to varying degrees, other G7 countries -- that would shed a

light on the topics discussed and the different points of views. 

     The next announcement will be on December 6, with most analysts expecting

no interest rate hike.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: M$C$$$]