CAD: Still dovish BoC & NAFTA uncertainty weigh on the loonie – MUFG

The Canadian dollar corrected sharply lower yesterday after USD/CAD’s attempt to break below the 1.3000-level was rejected in the near-term notes Lee Hardman, Currency Analyst at MUFG.

Key Quotes

“The loonie has displayed strong upward momentum since late last year falling from a peak of close to the 1.3600-level. The loonie’s correction lower was overdue as its strength was beginning to overshoot key short-term fundamental drivers. The correction lower leaves USD/CAD more closely in line with our short-term valuation model estimate at around the 1.3300-level.”

“There appears to have been two main triggers for the correction. The BoC maintained a more dovish than expected tone despite the recent improvement in the Canadian economy. Governor Poloz stated that a rate cut still remains on the table although the likelihood of it being delivered has diminished in the near-term. The BoC is still concerned by downside risks to Canada’s economy including uncertainty related to a shift to more protectionist trade policy under President elect Trump.”

“Those concerns surfaced yesterday during Wilbur Ross’ confirmation hearing to become the new Commerce Secretary. He stated that his first priority would be to renegotiate NAFTA with Canada and Mexico who are expected to receive notification within days that the US wishes to re-open the pact. Wilbur Ross presented himself as “pro sensible trade, but not pro trade that is to the disadvantage of the American worker and the American manufacturing sector”. His comments hit the Mexican peso the hardest although China bore the brunt of his criticism.”