C$ climbed ahead of Poloz, shaking off lower oil prices, but retreats after comments

The Canadian dollar strengthened against its broadly firmer U.S. counterpart on Thursday, shaking off lower oil prices, as investors assessed political uncertainty and braced for comments from Bank of Canada Governor Stephen Poloz.
   
The Bank of Canada released its review of developments in the financial system, followed by a news conference with Poloz. Investors weighed Poloz's assessment of the housing and mortgage markets in light of recent troubles at non-bank lender Home Capital. Debt loads tied to overheated Canadian housing markets are making households more vulnerable, but on the whole Canada's economy is resilient enough to withstand any major shocks to the system, the Bank of Canada says.
 
Canada's central bank released its semi-annual Financial System Review on Thursday, a document which outlines some of the major risks that the Bank of Canada sees on the economic horizon. As expected, the housing market and debt loads tied to it features prominently in the report.
 
Specifically, the bank mentions an increase in uninsured mortgages, and growth in home equity lines of credit, since the last review in December. Most of the bank's concerns from the housing market stem from activity in the two markets that tend to get a lot of attention: Toronto and Vancouver.
   
New housing prices in Canada jumped 0.8 percent in April from March, the biggest gain in almost a year, Statistics Canada said. The data will undoubtedly fuel worries about a potential housing bubble in Vancouver and Toronto, where prices rose the most in 28 years.            
   
The U.S. dollar rose against a basket of major currencies after the European Central Bank cut its forecasts for inflation, weighing on the euro. Gains for the greenback came after testimony by former U.S. FBI Director James Comey to a Senate committee. Prepared testimony released on Wednesday was seen as containing few surprises. Results of a parliamentary election in Britain are also due.
   
The price of oil, one of Canada's major exports, fell to one-month lows after an unexpected surge in U.S. inventories and the return of more Nigerian crude aggravated investor concerns about an already oversupplied market. U.S. crude prices were down 0.77 percent to $45.37 a barrel.
   
In early morning trading the Canadian dollar was trading at C$1.3491 to the greenback, or 74.12 U.S. cents, up 0.1 percent, but fell back to 1.3505 after the Bank of Canada announcements. The currency traded in a narrow range prior of C$1.3486 to C$1.3522.
   
In other domestic data, seasonally adjusted housing starts fell to 194,663 units in May from a revised 213,498 in April. Canadian government bond prices were little changed across the yield curve, with the two-year price flat to yield 0.715 percent and the 10-year falling 1 Canadian cent to yield 1.41 percent. On Tuesday, the 10-year yield hit its lowest intraday in nearly seven months at 1.373 percent.
 
The greenback held gains against a basket of currencies on Thursday as investors took stock of former FBI Director James Comey's testimony to the U.S. Senate, while the euro weakened after the European Central Bank kept interest rates on hold.
 
Comey on Thursday accused President Donald Trump of firing him to try to undermine the bureau's investigation into possible collusion between his 2016 presidential campaign team and Russia, but did not say whether he thought the president sought to obstruct justice.
 
The U.S. dollar index, which tracks the greenback against six major rivals, was up 0.27 percent at 97.01. Against the yen, the greenback was up 0.26 percent to 110.07 yen, after rising to a two-day high of 110.38 yen.
 
So far we haven’t had any major surprises or any kind of bombshells released. The dollar-yen ran up a little bit as the testimony got underway, suggesting a little bit of a relief on the fact that we are not likely to get a smoking gun from James Comey that we did not already know.
 
European bonds jumped and the euro and bank shares stumbled backwards on Thursday, as ECB chief Mario Draghi took markets by surprise on Thursday with a robust signal the bank had no plans to cut back its stimulus any time soon.
 
It was the first instalment of a packed day for markets, which includes the Senate testimony of the FBI chief fired last month by U.S. President Donald Trump, and will conclude with the result overnight of a snap election in Brexit-bound Britain.
 
Wall Street opened broadly steady in New York after the latest drop in jobless claims, but it had been set to be more impressive before Draghi's caution.
 
Despite data earlier in the day showing the euro zone growing at its fast clip since the ECB started printing money, the ECB head played down expectations that had been building that it could soon be scaling it back.
 
"I want to emphasise that basically the ECB will be in the market for a long time," Draghi said at meeting held in Estonia. Asked about possibility of reducing its asset purchases in September he added: "That was not discussed."
 
European banks led a sharp stocks retreat after Draghi's comment but another sharp U-turn hoisted them up more than 1 percent again. The rise came after signs emerged of another euro zone bank rescue, this time in Italy, as well as a pop in energy stocks as oil recovered from a 5 percent tumble.
 
Draghi's comments also briefly knocked the euro back below $1.12 while bond yields slumped in Germany, hit a multi-month low in Spain and saw the biggest drop since December in Italy.
 
"The market's initial assessment is that the ECB is not quite as close to policy normalisation as previously thought," said Philip Shaw, chief economist at Investec in London.
 
The dollar was also beginning to find some traction having been in a holding pattern. The yen had landed a glancing blow overnight after stimulus withdrawal talk from a Bank of Japan policymaker, but the greenback had all but recovered as focus returned to the day's main events.
 
Former FBI Director James Comey later began testifying to the U.S. Senate Intelligence Committee over his statement that Trump asked him to drop an investigation into the ties the president's former national security adviser had with Russia.
 
Wall St markets largely shrugged off Wednesday's written testimony releases as not toxic enough to ratchet up the threat to Trump of an impeachment. To be honest, I'm absolutely staggered about the degree to which this geopolitical environment and developments are having absolutely no effect on markets. I'm old enough to remember how nervous the market used to get about this kind of stuff back in the day. I admit I don't know how to price it, but it's really staggering.
 
With the VIX implied volatility index, the markets' so called 'fear gauge' hovering just above 10 percent, similar arguments are being made about the UK election, the race for which has tightened drastically in recent weeks
 
London's FTSE was beginning to sag as the day wore on and after a solid start the pound had drew back to $1.2940. For all the speculation about a hung parliament or a Labour-led coalition, the central assumption was the governing Conservatives would slightly increase their majority, a result also suggested by recent, though divergent, opinion polls.
 
Spot sterling has been firm in recent days, although the jump in overnight implied volatility readings to some 30 percent – the highest since July – showed some pricing of possible risks over the next 12-18 hours.
 
The biggest moves of the week so far remain centred around ebbing energy prices and inflation outlooks in general.
 
Brent crude stabilized at $48.50 a barrel in European trading, after another steep drop briefly below $48 overnight. It is now down more than 7 percent year-on-year.
 
With inventories showing no easing of the global glut, a row between Qatar and its Arab neighbours is seen as undermining the OPEC consensus about production cuts to limit oil supply.
 
Financially, the isolation of Qatar is taking its toll on the country’s debt and currency markets. Standard & Poor's downgraded Qatar's debt on Wednesday and Moody's warned on Thursday that it saw risks too if the situation continued.
 
The riyal currency held near to an 11-year low in its pegged band and though stocks bounced more than two percent, Qatari sovereign dollar bonds extended their losses and the cost of insuring exposure to the kingdom's debt rose to the highest level since mid-November.