Upward Revisions in Canada Support the CAD - UBS
The Bank of Canada left the overnight policy rate unchanged at its April
meeting, in line with consensus expectations. UBS analysts noted that
the more important decision taken during the monetary policy meeting is
the revision to Canada’s economic outlook. The central bank raised its
2016 GDP growth forecast to 1.7% from 1.4%.
Key Quotes
“The
upbeat tone of the official statement as well as the governor's press
conference confirmed our view that things are slowly improving for the
country’s economy and that this will support its currency. We continue
to recommend an overweight position in the Canadian dollar, financed
with an underweight in the Australian dollar.”
“April’s meeting
was the first time the Bank of Canada could account for the newly
announced national budget, which it believes will boost GDP growth by
0.3 percentage point both this year and next. The meeting also discussed
the latest developments in global financial markets as well as the US
economy, which it surprisingly judged as overall slightly negative for
Canadian growth. Nonetheless, the bank believed that "the positive
forces at work in the economy are starting to outweigh those that are
negative." Thus, the meeting concluded with the first upward revision to
Canadian GDP after five successive quarters of downward revisions, and a
judgment that the worst may be over for the Canadian economy.”
“We
would agree with this stance and expect the Canadian dollar to remain
supported over the medium term. Over the very short term, however, we
think the risk of a setback has increased following the recent rally in
the CAD as well as global oil prices. We therefore cannot rule out the
USDCAD trading above 1.30 again. We continue to recommend overweighting
the Canadian dollar against another commodity currency – the Australian
dollar – which remains overvalued in our view.”
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