We Forecast Stronger CAD
The Monetary Authority of Singapore tightened policy overnight, announcing it would allow the SGD policy band to appreciate at a slightly faster pace than previously. More specifically the slope of the band is to be “increased slightly” although the band itself will be narrowed and the midpoint left unchanged. The decision briefly added to the risk-on mood in G10 FX, giving the euro and the Australian and New Zealand dollars a modest boost. The relief was not to last however. A disappointing Q1 GDP print from China triggered a 50 pip selloff in AUD. At 8.1% y/y it was well below the 8.4% Bloomberg consensus, and much softer than local media predictions which anticipated a number in the vicinity of 9.0%. Asian stocks managed to stay in positive territory all the same, buoyed by the S&P500’s solid +1.4% gain. While we maintain the Fed will eventually start to ‘normalise’ policy in 2013, the Bank of Canada is likely to signal its intentions much earlier, underpinning our upgraded view on the Canadian dollar. Indeed, we have revised our one-month and three-month USDCAD forecasts to 0.9900 and 0.9800, respectively, from 1.01 and 1.03 previously. Recent strength in employment data in Canada have raised the prospect of the Bank of Canada moving to an explicit tightening bias, in line with more rapid tightening of the output gap. Strength has also been apparent in other indicators such as the Q1 Senior Loan Officer’s Survey as well housing activity and price data. The Bank’s growing fears about household leverage and rapid house price gains have led to suggestions that it may even resort to rate hikes purely to mitigate bubble risks. And the apparent decline of European ‘tail risk’ after successful LTRO operations by the ECB now gives the BoC more room to focus on domestic developments. With the market only marginally pricing in rate hikes in the next 12 months (one-year OIS is around 1.05% versus the base rate of 1.00%), there is upside room for both rate prospects and by extension the Canadian dollar if more moves are priced in over coming weeks. The Bank of Canada’s next rate decision on April 17 provides an opportunity to hint in this direction. Our 1.05 12-month target remains unchanged though. Ahead today, CPI prints in Germany and the US are due. Bernanke and Dudley top today’s Fed speaker list.
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UBS Investment Bank