CAD: We retain bearish view ahead of BoC - ING

Viraj Patel, Foreign Exchange Strategist at ING, explains that considering the current policy stance of the Bank of Canada, that will announced tomorrow its decisions, staying short in the CAD could be an option to consider.

Key Quotes:

“Rates are expected to remain on hold when the BoC meet this week (Wed). Planned fiscal stimulus introduced by the Trudeau government earlier in the year has partly eased the burden on monetary policy to provide a desirable boost to the economy.”

“At an already low rate of 0.5%, the BoC has limited conventional policy ammunition left; keeping rates on hold may be the prudent option for now given that downside domestic risks continue to linger in the backdrop. Yet, given (i) the BoC’s penchant to surprise markets and (ii) signs of weakness in oil markets, we retain our bearish near-term CAD view.”

“The BoC are likely to be wary of further CAD appreciation and we continue to see USD/CAD 1.25 as the near-term lower bound threshold; any material move below here could be met with more forceful action from the central bank (ie, aggressive jawboning or even a rate cut).”

“Given the central bank’s penchant to surprise (recall the Jan 2015 rate cut), we would not rule out the likelihood of a more materially dovish BoC at tomorrow’s meeting. Markets are pricing in little expectation of additional easing – with only a 25% chance of a rate cut this year priced into the OIS curve.”

“We estimate that USD/CAD could trade up to 1.33 on the back of lower short-term CAD rates.”