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Yesterday, the Bank of Canada (BoC) abandoned its slightly restrictive bias by omitting the reference to “future rate increases” from its statement, kept rates unchanged at 1.75%. However, the Canadians have changed track too. It now assumes a neutral approach, continues to consider an accommodating monetary policy to be justified and makes it data dependent. The reason behind this move is the surprisingly weak growth in Q1. The BoC lowered its growth forecast for 2019 from 1.7% to 1.2% but expects a recovery in the second half. It attributes the economic weakness at the start of the year to uncertainties regarding the global trade conflict. Otherwise, things are going well domestically and inflation is not an issue either, as it is likely to remain in the area of its 2% target.
We would have liked the BoC to remain steadfast, but can understand that it has become cautious just like many of its peers in view of weak global growth, originating in the manufacturing sector but with causes that are difficult to explain. The market is similarly disappointed and as a result, CAD has come under pressure.
USDCAD had traded firmly lower in the wake of the stronger-than-expected January GDP print from last week and has subsequently seen the largest pickup in short-end rates in G10 this week.
Still, CAD failed to trade materially stronger with the host of risk-positive drivers that permeated throughout the week, including a +4.5% gain in oil. This underscores that more timely economic indicators like Canada’s Markit manufacturing PMI continue to underwhelm, and payrolls this morning contracted for the first time since August.
Trade tips:
Activated USDCAD at 1.3364 at the beginning of March, we wish to uphold the same positions. Marked at 0.25%.
Activated a -3m/+7m OT USDCAD calendar call spread (k=1.40) for 16.70% in mid-January, we wish to uphold the same positions. Marked at 19.39%. Courtesy: JPM & Commerzbank
Currency Strength Index: FxWirePro's hourly USD spot index was at 80 (bullish) and CAD is at -24 (mildly bearish) while articulating at (09:09 GMT).
For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex
