FxWirePro: USD/CAD Calendar Call Spread Ahead of BoC

The CAD is strong, up 0.3% vs. the USD and outperforming all of the G10 currencies along with its growth-sensitive commodity currency peers AUD and NZD. The domestic risk is elevated as market participants look to the 8:30 am ET release of Q4 GDP (consensus 1.0%, BoC MPR forecast 0.8%, and consider its implications for the BoC. Both BoC and ECB meetings should deliver a constructive message this week with a focus renewed focus on policy normalization.

We continue to feel that markets are underpricing the risk of renewed policy normalization in the latter half of 2019 and anticipate a constructive message in today’s statement. BoC DG Patterson will also deliver an Economic Progress Report speech on Thursday. OIS is currently pricing slightly less than 5bpts of BoC tightening by July. We are quite bullish on CAD into this week’s BoC events in the near-term.

Nevertheless, we maintain our medium-term bearish CAD view, as a result, expressed a one-touch calendar call spread. 

Well, especially, in particular, we have reservations about the smoothness of the USMCA ratification process, which is starting to show some signs of life in DC and is largely tracking our timeline and base case for now. Shorter-term drivers were in focus this week for CAD, though. 

In particular, Canadian Q4 GDP disappointed across the board versus expectations (0.4% vs 1.0%), whereas US GDP outperformed (2.6% vs 2.2%), and is the lowest quarterly growth rate since 2016. 

Given the importance of the m/m figure (-0.1%) in BoC policy-making, this is likely to reinforce the wait-and-see pause for some time, even with the acknowledgment that the policy rate remains 75bps below the neutral range. 

Meanwhile, CAD may yet come under pressure as political risk mounts surround PM Trudeau in the SNC scandal. 

In addition to serious allegations against the PM and calls for him to resign, Canada is set to hold federal elections later this year. 

Activate a -3m/+7m OT USD/CAD calendar call spread (k=1.40). Paid 16.6% on January 15th. Marked at 18.27%. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly CAD spot index is flashing at 99 (which is bullish), while hourly USD spot index was at 102 (bullish) at 06:13 GMT.

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