USD/CAD: Poloz neutral on rates. Short for 1.2550

• Bank of Canada Governor Stephen Poloz defended the use of inflation targets and reiterated that policymakers will be cautious about future interest rate moves even as encouraging signs of wage growth show up.
• With two rate hikes behind him, Poloz said the central bank had a good understanding of what is driving inflation and would be comfortable with missing its 2% inflation target on the upside as well as the downside, as long as it was temporary.
• Poloz maintained a neutral tone on the next rate move, repeating the bank's message that it was monitoring wage growth and inflation, as well as economic capacity to see how the economy was adjusting to rate hikes in July and September.
• Financial markets had expected a more dovish message, but Poloz offered no clues as to whether the bank will hike rates again in December or wait until 2018. Markets had been surprised by the second hike in September. Poloz warned the closer Canada gets to full output and employment the greater the risk inflation pressures will appear, and repeated his message that less stimulus will be required over time.
• He said the October jobs data showed encouraging signs of wage growth, but said slack remained in the labor market and it was too early to say it was the beginning of an uptrend.
• Poloz defended the bank's decision to raise rates despite inflation remaining below the 2% midpoint of its target range, and said the bank was open to allowing inflation to overshoot the target after a period of undershooting it - at least in the short term.
• Prices of oil, one of Canada's major exports, cooled after recent rally, as the Saudi crown prince tightened his grip on power, and tensions flared between Saudi Arabia and Iran. The Organization of the Petroleum Exporting Countries, led by Saudi Arabia, has agreed to restrain crude output by 1.8 million barrels per day together with 10 other nations including Russia until March 2018. OPEC meets at the end of this month and has been widely expected to extend the deal. The producers are in the process of inviting other countries to the November 30 meeting, with a view to joining the deal.

• The USD/CAD failed to break below the 1.2714 support (23.6% fibo of 1.2059-1.2916 rise), but long upper shadow on yesterday’s candlestick together with today’s continuation of a fall suggest that another attempt to break this level is likely.
• We stay short for 1.2550.

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AUD/NZD: RBNZ to stay on hold today
Macroeconomic overview:

• The Reserve Bank of New Zealand is expected to stay on hold tonight, leaving the official cash rate at the current 1.75% level. The final statement, in which the central bank will probably reiterate that monetary policy will remain accommodative for a considerable period, could still draw some attention, as it comes after pressure has been raised on the RBNZ by the new Labor-led government to change the central bank’s mandate. The current inflation target has been left unchanged at 1-3% on average over the medium term, but a full-employment target will be added as soon as possible in 2018.
• New Zealand Finance Minister Grant Robertson said that there will not be a specific number for it, but it is worth remembering that the New Zealand’s jobless rate, at 4.6% in the third quarter of 2017, hit a record low at 3.4% in December 2007, so we can presume that a drop below 4% could be considered a reference point.
• The government also plans to create a committee including external experts to decide monetary policy (while at present the RBNZ governor is solely responsible for this) and publish the minutes of each meeting. Under this framework, speculation has already risen that the RBNZ may delay the start of interest-rate normalization until after the RBA and this risk has already been reflected in the AUD/NZD rally up to an 18-month high at 1.1291 in October. Profit taking has taken some shine off this cross rate in the past few weeks but renewed appreciation can be penciled in over the coming months if further political pressure on the RBNZ turns into concrete action.