The Canadian dollar had its share of wobbling amid news flows. After the BOC, the team at Credit Agricole still sees a bullish move in USD/CAD:
Here is their view, courtesy of eFXnews:
The BoC policy announcement was broadly in line with expectations. Growth projections for 2016-17 were revised slightly higher but the statement brought back the October assessment that the risks to the outlook were “roughly balanced” and that uncertainty was high. The bank had incorporated some US fiscal stimulus into its projections but its positive impact on growth is offset by higher Canadian long-term rates and firm CAD TWI. The statement and the MPR also noted that Canadian spare capacity was materially higher than in the US and that the output gap is not expected to close until mid-2018.
All-in-all this is consistent with our view of steady policy in 2018. The press-conference by Governor Poloz turned out to be another source of FX volatility however. USD/CAD surged from 1.3060 to above 1.32 as Governor Poloz said, in response to a question on whether policy easing was discussed, that a rate cut was “on the table”. The Governor later clarified that there were no reasons for easing for the moment but the damage was done.
We read this more as another communication misstep than a new policy signal but to the extent that rates markets had priced in a 30% chance of a hike by year-end, some flattening of the Canadian BA curve is probably in order.
We remain bullish on USD/CAD as we see the combination of steady Canadian and higher US front-end rates pushing the pair up to 1.40 by mid-2017
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