Bank of Canada blindside market - AmpGFX

The CAD has surged on Monday following a speech by BoC Deputy Governor Wilkinson as the BoC has a history of swinging their view and catching the market off-guard, explains the research team at Amplifying Global FX Capital.

Key Quotes

“Canadian two-year rates have surged by around 12bp since Friday.  Suddenly the 12 July policy meeting appears in play for a possible rate hike; albeit still a modest 13% chance.  And a 60% chance of a 25bp hike by year-end.”

“Rates have been at a record low of 0.5% since mid-2015, cut twice in early 2015 from 1.0% in response to weaker oil prices crunching energy sector investment. The optimistic tone struck by Wilkinson included a recovery in business investment in the energy sector.”

“It is interesting that the BoC would flag a tightening bias just at the time when energy prices have ebbed from recent highs and competition from the US energy sector is growing.  And threats to the Canadian economy that arise from tighter lending conditions and regulatory and tax policy that may dampen housing market activity.”

“Nevertheless, policy makers are impressed by broadening evidence of robust activity. Wilkinson said that the 3.7% q/q saar GDP growth was “pretty impressive”.”

“It does appear that the shift in tone on policy has caught the FX market with a significant net short CAD position.”

“From our viewpoint, we are somewhat surprised that the BoC has expressed so much optimism in light of significant uncertainty related to energy prices, its own housing market, and political uncertainty in the USA, including threats to NAFTA.  But there has been stronger economic indicators and these at face value justify a BoC tightening bias.”

“USD/CAD has broken a recent uptrend, Canadian yields have jumped sharply, and market positioning has been caught out well short CAD.  This creates a risk of further significant gains in CAD near term.”

“The market may look for parallels with AUD and NZD.  However, we expect both these central banks to be much more cautious about adjusting their policy statements.  Both tend to prefer a weaker exchange rate and maybe more concerned by vulnerabilities in their housing markets and household debt.”