USD/CAD, BoC outlook and implications of 1.4500 – TDS

By FXStreet FXStreet (Guatemala) – Analysts at TD Securities offered an insight into the BoC next week and USD/CAD at 1.4500.

Key Quotes:

“Fundamentally, we think rates are still underpricing the chance of a BoC rate cut next week. A 25bp cut would easily imply a move above 1.45 based on current rate differentials (assuming Fed expectations remain unchanged).”

“But note that while crude oil has been a major catalyst to the move higher, relative policy expectations and EMFX vol have also grown in significance based on rolling 30-day correlations complicating a directional view at this juncture.”

“Moreover, the deviation between our high frequency FV model (~1.4050) and spot is now roughly 1.5 standard deviations wide. While FV is more contemporaneous rather than predictive, such a deviation is typically a red flag that has more often than not, presaged a correction. There may be a greater risk of a consolidation in the coming weeks with growing expectations of a cut next week. Should the BoC leave policy on hold, the risk/reward dynamics leave USD/CAD extremely vulnerable especially with oil prices at very low levels.”

“Another concern we have is that the 1.45 level may compel longer-term players to fully implement incomplete hedging FX programs, creating topside supply …read more

Source:: FX Street