CAD Firms Ahead of BOC Decision; Loonie Come Long Way - Analysts

CAD Firms Ahead of BOC Decision; Loonie Come Long Way - Analysts

11 April 2016, 23:10
Vasilii Apostolidi
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The Canadian dollar held a firm tone versus the greenback Monday, ahead of this week's Bank of Canada meeting, where policy is expected to remain unchanged, but growth projections may be revised higher.

In the near-term, the loonie, which has come a long way since it bottomed near 13-year lows in January, will take its cue from oil prices and BOC direction, analysts said.

Dollar-Canada was trading at C$1.2892 in afternoon action, on the low side of a C$1.2889 to C$1.3016 range.

It peaked at C$1.4690 on Jan. 20, 2016, the highest level seen since April 8, 2003, when dollar-Canada posted highs around C$1.4814.

From the C$1.4690 dollar-Canada high to the dollar-Canada low of C$1.2858, seen March 31, both 2016 peaks and troughs, the loonie was up by 12.5%.

Depending on what the BOC says this week and whether West Texas Intermediate can take out recent highs near $41.90 ahead of the April 17 meeting of OPEC and non-OPEC members, dollar-Canada may soon take out the 2016 lows, which will target the Oct. 15, lows near C$1.2832.

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The January dollar-Canada high went hand in hand with soft Canadian data and falling crude oil prices. WTI bottomed at $26.19 on Jan. 20, which at the time was the 2016 low and the lowest levels since May 8, 2003.

Crude later posted new 2016 low of $26.05 on February 11.

The loonie has been underpinned in recent sessions by a an overall softer U.S. dollar tone, a rebound in oil prices, as well as a rethink of BOC policy, especially in the wake of recent upbeat data.

Stats Canada reported Friday that Canadian employment rose by 40,600 in March, well above MNI's median of 5,000 and compared to a decline of 2,300 in February.

Also last week, Canadian building permits rose by 15.5% in February, erasing the 9.5% drop seen in January.

Housing starts were 204,251 SAAR in March down from 21,9,077 units in February but above MNI's median of 190,000.

"The stronger than expected March employment data reported before the weekend prompted some observers to rule out another rate cut, but the market had already come to this conclusion," said analysts at Brown Brothers Harriman.

Indeed, the Canadian dollar rebound, from the multi-year lows seen in January, "saw the implied yield of the June 2016 BA futures rise from 60 basis points to 90 basis points," they said.

Friday's jobs release "was insufficient to lift the implied yield of the June BA futures further," the analysts said.

In terms of BOC expectations for Wednesday, while no change in policy is expected, the market is eager to see the central bank's new growth forecasts.

"The Bank of Canada may revise up its GDP forecasts in light of recent economic data and the more stimulative budget," said BBH analysts.

"However, it may also caution the market against prematurely tightening financial conditions," they added.

Analysts interviewed by MNI said they will look especially to the tone and projections of the BOC's new Monetary Policy Report for the economic outlook Wednesday.

All expect the BOC to continue with its 0.50% policy interest rate despite an improving trend in United States import demand and in some key new domestic indicators.

No rate cuts, no rate hikes, for several quarters to come, probably right through 2017, is the general analyst view.

See MNI Main Wire story at 12:30 p.m. ET for details.

With WTI prices back over $40 per barrel again, well up from the $26 lows from January and February, the market is eager to hear the BOC's views about the rebound in oil.

"On inflation, the recovery in oil prices and its impact on gasoline prices means that headline inflation will be revised higher and is likely to be around 1.5% by mid-year and to end the year close to 2%," said strategists at Nomura.

"On core inflation, the tug-of-war between the weaker CAD and the wider output gap is likely to continue in the short term, but the stronger growth will mean that the output gap closes faster and could slightly raise expected core inflation," they said.

Charles St. Arnaud, FX strategist at Nomura, recently revised his forecasts for commodity currencies to reflect "moves in commodity prices and USD weakness."

Nomura continued to maintained the view that Aussie, Canadian and New Zealand dollars are "all slightly overvalued given current levels of commodity prices and the rate differentials," with the currencies likely to weaken later in the year.

"However, we believe that these currencies are likely to depreciate slightly less than previously expected," St. Arnaud said.

Nomura's new Q3 C$ forecast is C$1.38 versus C$1.40 prior and new Q4 forecast is C$1.35 versus C$1.40 prior.

"This week's BOC meeting is a large idiosyncratic risk for CAD," observed Vassili Serebriakov, FX strategist at BNP Paribas.

Because of this risk, BNPP Monday has taken profit on its long WTI and long dollar-Canada position, he said.

"With the error correction CAD/oil model now showing fair value at C$1.2982, most of that overvaluation appears unwound and we opt to take 1.55% profit (ref USDCAD at 1.2993, May WTI contract $40.20/bbl)," Serebriakov said.

On Wednesday's BOC decision and projections, "Last week's Canadian employment data has reduced the likelihood of a dovish shift in message at Wednesday's BOC meeting, and we expect macro projections in the Monetary Policy Report to upgrade growth forecasts in line with the roughly 0.5 percentage point boost for 2016 associated with the new government's budget," he said.

HSBC strategists maintained that Canadian fiscal policy may soon be playing a greater role, which could benefit the loonie further.

With "balanced budgets for the last two decades," Canada's "historic prudence" means that the country "has the wherewithal to offer a helping hand to the economy," they said.

The strategists noted that "Canada's net debt is less than 40% of GDP, the lowest in G7."

HSBC looked for the loonie to "reap the rewards" of fiscal stimulus and has a dollar-Canada forecast of C$1.2500 for the end of December.

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