Tactically Long EURCAD into BoC & BoE - TDS

Research Team at TDS, suggests to enter a tactical long EURCAD at 1.4485 into the BoC/ BoE meetings and they target 1.50 with a 1.4250 stop-loss.

Key Quotes

“We expect the BOC to leave the overnight rate unchanged. The communique and accompanying forecasts should reflect a greater amount of uncertainty amid potential spillover effects from Brexit. This, we think, will weaken the CAD. Beyond the negative growth revisions, the Business Outlook Survey offered a more sober assessment of the growth outlook compared to the Governor’s recent optimism in his June 15th speech. We are wary that Poloz may sound less concerned in the post-decision press conference however.

We expect the BOE to cut by 25bps on Thursday. The analyst community is evenly split on the decision and a cut is largely priced into the UK curve. Carney’s emphasis on transparency suggests to us they may provide further indications on what may lie on the monetary policy horizon. These indications of further action do not yet appear priced in. With the EURUSD/EURGBP correlation broken since Brexit, EURGBP should remain supported even should the BOE opt to hold steady (highly unlikely in our view). As such, EUR crosses should be relatively immune to downside. Note the EURCAD/EURGBP correlation has weakened but remains modestly positive over longer time frames.

Real yields and broader FX developments have diverged. Of note, the UST-Bund 10yr real yield spread has closely tracked EURUSD (since the onset of ECB stimulus in early 2015) and suggests the currency pair should trade closer to 1.14. Similarly, the US 10yr TIPS yield have also tightened its correlation with the DXY, which we think reflects the Fed’s capitulation over their conviction about normalization, especially the longer-term dot plot. We would expect FX to converge with real rates, which reflect more accommodative stances, but more importantly, should provide EUR support.

Our US rates team believes that breakevens have limited downside and that 10yr real rates have room to decline another 25-30bps. Though we are selectively bullish the USD since June 23rd, this nonetheless presents a near-term downside risk for the USD. This, along with a risk that we see in the Poloz press conference, may complicate USDCAD’s topside leap and is the primary reason why EURCAD longs might offer a more unobstructed topside path than USDCAD, especially with positioning in CAD overextended in net longs.”