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BoC is scheduled for their monetary policy next week. It looks like another BoC communications flip-flop. Senior DG Wilkins stoked rate cut speculation with comments suggesting that policy makers had room to manoeuver on rates and could look through on-target inflation and strong jobs if need be. Her comments came amid a speech on broader financial stability issues and markets perhaps read a little too much into them, given the context. But investors can be excused for being sensitive to the Senior DG’s comments, given the 2017 experience. It was left to Gov. Poloz to tidy the outlook up Thursday by showing little inclination to acknowledge near-term easing risks; policy is already accommodative and “about right” the governor remarked. Rates may still ease a little more but the risk of a near-term cut is zero and OIS pricing is adjusting to reflect that (implying around 7% probability of a Dec 4th ease at writing, down from 26% following Wilkins’ remarks).
The outlook for the CAD over the coming week (and perhaps a bit beyond) is very mixed, on the basis of our charts below. On the one hand, relative data surprises continue to shift in the favour of the USD while the seasonal under-performance in the CAD may still have some room to run (even if this year’s “flight path” for the CAD looks a bit more like 2017 than the average CAD performance over the year since 1990).
On the flip side, the CAD is most tightly correlated with US/Canadian 5Y bond spreads while speculative accounts continue to prefer long CAD positioning. But neither the narrowing USD yield advantage nor bullish CAD speculative sentiment is getting much traction with the exchange rate. The fundamental situation suggests the most likely course of action is a little more range trading around current levels in the coming week between 1.3370/80 and 1.3190.
The Canadian data schedule is relatively light over the coming week; Wholesale Trade data for Sep are released Monday. Q3 Current Account data are published Thursday. Sep and Q3 GDP data are released Friday. Growth is expected to slow sharply from the 3.7% clip recorded in Q2 (Q/Q, ann.) but that will be in keeping with BoC expectations (and should therefore have no bearing on the near-term rate outlook). Scotiabank Economics’ GDP Nowcast is tracking Sep (M/M) industry-level GDP at a little below zero and Q3 GDP at 1.2% (just below the BoC’s Oct MPR forecast of 1.3%).
Options Trades Recommendation: We advocated USDCAD diagonal debit call options spreads at spot reference: 1.3063 level in 3m/2w debit call spread structure (strikes 1.3215/1.3793) for a net debit.
OTC Outlook: The bullish neutral risk reversal numbers indicate the bullish setup, positive RRs are indicating the hedging sentiments for the upside risks. While the positively skewed IVs of 3m tenors are also indicating the upside risks. Courtesy: Saxo & Scotiabank
