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The Bank of Canada stays on hold but retains dovish tone. The Bank of Canada left its benchmark overnight rate unchanged at 0.5 pct at its October 2016 meeting as widely expected. The policymakers said the growth outlook is lower than projected due to slower housing resale activity and exports and that inflation remains below expectations.
The crude oil prices have rebounded by over 50% since late January. This will temporarily boost headline inflation above the underlying trend represented by the core rate in Canada, which has remained stable in the recent years.
We are currently long of NOK and CAD in the portfolio albeit with different motivations and in different forms. The bullish view on NOK is predicated on multiple factors, not just higher oil prices: improving growth momentum, a central bank that is turning less dovish, fiscal policy that continues to be simulative, real policy rates that are the most negative in G10, all coupled with still-cheap valuations. All these factors leave us structurally bullish on NOK which we are positioned for outright via short EURNOK.
By contrast, the tactically bullish view on CAD was initiated last week since we deemed the US election concession in the currency to be quite large and expected it to fade. The trade was recommended via a 2m AED dual digital and looked for a relatively modest decline in USDCAD of 1% atms (alongside a resumption of Brexit related weakening in GBPUSD over the same horizon).
However, CAD weakened the most in G10 this week as the BoC surprised markets by admitting that it had considered easing, helping push USDCAD to a new 6-months’ highs.
Admittedly, the BoC’s dovish stance is a risk to the trade but USDCAD still appears modestly expensive on our fair value models and an increase in oil prices in line with our expectations should be a source of support over the 2m horizon of the trade.
Stay long G10 Petro-currencies: The conviction level is higher on NOK which is held outright vs. EUR. Long CAD underperformed on a dovish BoC but we maintain the recommendation which is held via a 2month AED dual digital.
Our bullish view on oil if realized should be supportive of both trades.
Stay short EURNOK in cash and short GBPCAD through a 2m at-expiry dual digital USDCAD < 1.30, GBPUSD < 1.2090.
