Canadian dollar took off 'like a scolded cat' post-BoC - Outlook for CAD Remains Challenging in the Near-Term

By Gary Howes

The Canadian dollar took off 'like a scolded cat' in the aftermath of the BoC policy announcement yesterday and opens about 2 big figures lower against the US dollar this morning relative to yesterday’s open.

The outlook for the Canadian dollar (CAD) could note be weaker than it currently is. That said, the chance of a relief move higher in coming days should be expected.

The runaway train that is the Canadian dollar (CAD) continued to chug lower overnight but losses here were surpassed by a slide in the AUD on the back of weak Chinese PMI data.

The outlook for the Canadian dollar remains undeniably poor at present, however most major currencies are wildly overbought against the CAD at present, hence we would expect a little respite and a correction in favour of the CAD in coming days.

A look at the exchange rate markets shows:

• The British pound sterling to Canadian dollar exchange rate is 0.5 pct higher than seen at last night's closing rate having reached 1.8477.
• The euro to Canadian dollar exchange rate is 1.03 pct higher at 1.5173.
• The US dollar to Canadian dollar exchange rate is 0.28 pct higher at 1.1118.

Note: Our CAD quotes are taken from the wholesale spot markets. Your bank will charge a spread at their discretion when passing on a retail rate. However, an independent FX provider is so well placed on the market that they are able to deliver you up to 5% more currency. Please learn more here.

There was no explicit easing bias in the Bank of Canada policy announcement yesterday, but additional comments from Governor Poloz in a TV interview late yesterday—indicating that the “door is slightly more open” to a rate cut—triggered more gains in Asian trade.

What's more, in the post-announcement press conference, there was no attempt to steer the market away from the impression that the BoC wants a still lower CAD; the MPR noted that, despite the recent depreciation, the CAD remained strong while Governor Poloz himself termed the weaker CAD the icing on the cake for exporters

Stephen Gallo at BMO Capital says:

"The current environment is one of ‘abnormal normalisation’. Policy makers are basically firing bullets and fighting fires.  To phrase this in a different way: any landing of a plane you can walk away from is a good one.  Yesterday, the BoC used minimal ammunition but got a decent amount in return anyway.  

"This is a not a ‘runaway’ weakening of the CAD mainly because the BoC is sitting on top of it.  We think there is quite a bit more ammunition left, and this is an extremely supportive factor for USDCAD.  Meanwhile, major currencies like the EUR and GBP remain firm, so there is a lot of interest to migrate away from the CAD and into alternatives."

Outlook for the Canadian dollar: Losses then gains?

It is this expectation for easing at the BoC that has got the market shedding their exposure to the Canadian currency.

Shaun Osborne at TD Securities remains resolutely bearish on the Canadian dollar's outlook in his update to clients today:

"USD/CAD took off like a scolded cat in the aftermath of the BoC policy announcement yesterday and opens about 2 big figures higher this morning relative to yesterday’s open. We still think there is a lot of room left in this move and, as pullbacks few and far between, we might just have to hold our nose and jump in."

Analyst Camilla Sutton at Scotiabank is confident that her bank's base call for a lower CAD in coming months remains the right one:

"We have made no change to our view and continue to expect CAD weakness over the next six months before it stabilises on the back of the powerful combination of a weak CAD and a building US recovery."

However, it is worth noting the view that Scotiabank see the Canadian dollar stabilising towards the end of the year; these declines can't go on indefinitely.

Indeed, Sutton says she does not see the Bank of Canada cutting interest rates at all, rather opting to keep rates steady and maintaining a vocal tone that would seek to keep the Canadian currency under pressure.

Nevertheless, the outlook continues to favour the USD over the CAD: "bullish all studies are in buy territory and momentum is strong,
the RSI has reached 80 (overbought) however currencies can remain overbought for extended periods and unless another studies shifts to sell, the upward pressure on USDCAD is too strong to fight."

Friday’s release of Canadian CPI is an important risk for CAD. The expectation is that the month‐over‐month print falls but that both headline and core CPI are inside the BoC’s control band at 1.3%y/y.