BoC in Focus: CAD move looks a bit overdone - TDS

Mark McCormick, Research Analyst at TDS, suggests that a firming up of risk appetite and a squeeze in oil prices helped CAD offset some the losses from the prior sessions.

Key Quotes

“USD/CAD is hovering around the 100dma near 1.30, and we continue to like holding short CAD exposure into the BoC this morning. We believe the risk/reward for USD/CAD upside is attractive ahead of the BoC even though it has disappointed a few time before—notably at the start of the year. Given a large overhang of long CAD positioning, we think a reassessment by the BoC could kick-start the move to 1.35.

For a start, the BoC will need to mark-to-market is macro forecasts a touch to account for recent slowdown. This reflects the impact of the wildfires, but growth is still slowing. It is clear that Canadian growth has decelerated and is currently running well below potential. This backdrop should see the BoC drop its glass-is-half-full stance, especially with the Brexit impact likely adding downside risks to their outlook.

The impact of data surprises matters for more for tier one data, which also offers little comfort for policy makers. Notably, Canada has seen significant downside surprises in trade, employment, and other reports. The latest BoC survey also showed ‘subdued’ sentiment.

Finally, despite the recent rally in oil, we note that CAD is trading rich to commodity prices. Indeed, the final chart shows CAD against a Canadian terms of trade basket. Even though oil gets all the hype, Canada also exports gold, paper, natural gas, lumber, and wheat. These other commodities account for about half of the terms of trade basket so should also be taken into consideration when benchmarking CAD. Based on a wider basket of commodities, the CAD move looks a bit overdone.”