Surprise BoC rate cut next week might propel USD/CAD higher towards 1.30 – SocGen

Surprise BoC rate cut next week might propel USD/CAD higher towards 1.30 – SocGen

10 July 2015, 11:14
Mirko Cerulli
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The Societe Generale Team, sees bullish potential ahead for USD/CAD if the Bank of Canada surprises the markets again with a rate cut in next week’s meeting, also the drop in oil prices combined with soft economic data suggests it is too early to rule out further easing possibility from the central bank.

USD/CAD bullishness stemming from interest rates seemed more likely to come from US rates, but near-term prospects are limited on the USD side as rates now discount a smaller probably of a Fed hike this year. On the CAD side, however, the BoC meets next week (15 July). The BoC is not a very active central bank, and market consensus does not expect it to cut rates again after the preventive 25bp cut in January. However, a new cut cannot be entirely ruled out."

“…we argued that barring another sustained fall in oil prices, the BoC was unlikely to cut rates again. Brent Oil plunged by 12% to $55 on 7 July, and although it has slowly recovered since then ($58 as we head to press), the commodity bloc has become vulnerable again. Total inflation is stalling at 0.9% despite core inflation remaining above 2% since last year (the central bank targets 2% total inflation within a 1-3% band). Lower oil prices are definitely affecting the economy, and the Q1 GDP release at the end of June came in significantly below expectations (1.2% y/y vs 1.5%).”

“The January rate cut was intended to prevent the adverse effects of the oil price move, but the very soft GDP print has increased the odds of a second cut mid-year. A disappointing jobs report on Friday would make it even more likely.”

“Finally, external trade is unlikely to boost growth, as the lower CAD has failed to offer support. The trade balance converted into USD shrank by almost as much as the balance denominated in CAD despite the fall in the domestic currency. That also suggests that more stimulus could be needed.”

“A surprise BoC cut next week could trigger the break of a major resistance area for USD/CAD. This would propel the pair towards 1.30 and possibly beyond.”
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