CAD: Extended softness - HSBC

Research Team at HSBC expects USD-CAD to push higher in the coming weeks as the Bank of Canada retains a resolutely cautious tone despite persistent upside surprises on the data.

Key Quotes

“If oil prices stabilise at around current levels, it would suggest the scale of the USD-CAD upturn will be relatively modest with resistance at 1.36 unlikely to be broken.”

“The March drop in oil prices has rejuvenated this as a talking point in currency markets, but it has not been a particularly potent driver to the CAD. Correlations between daily moves in USDCAD and shifts in the WTI price of oil have been -0.50 over the last month, noteworthy but not the only game in town.”

“The more significant factor in a likely push higher in USD-CAD is the still dovish stance of the BoC. The central bank has been at pains to stress that the Canadian economy is at a different point in the cycle to the US, presumably to ensure that Canadian rate expectations do not rise simply in response to a more hawkish view in the US. In a recent speech, Governor Poloz said that he is more worried about the downside risks and that raising rates prematurely would be almost certain to cause a recession.”

“This mind-set is interesting given that economic data continues to be better than expected. HSBC’s activity surprise index for Canada has been rising since October 2016 and the momentum was sustained through March. In response to a question about signs of improvement, the governor replied that “it would be odd to forget about all those downside risks just because a couple of data points came in a little bit better than expected." We expect such sentiments to be repeated in the tone of the BoC meeting on 12 April. The labour market data on 7 April will hold some interest for the market but it unlikely to alter the BoC’s perspective that slack remains evident.”

“Set against this policy perspective, we believe it will be difficult for the CAD to stage any lasting rallies, and so we would buy USD-CAD on any dips and look for it to extend higher towards 1.36 during April.”