USDCAD Forecast Revisions
The rally in US equities and higher commodity prices highlight the better environment for risk coming into Asia, helped by the prospect of continued Fed accommodation (reinforced by comments from the Fed’s Dudley and Yellen), decent Italian bond auctions, the strong March new lending figures in China, and the better than expected Australian jobs data. This has put the US dollar and yen on the defensive, leaving USDJPY in familiar ranges and overshadowed by the firmer profile of the Australian, New Zealand and Canadian dollars. 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 removal 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 intact. Ahead today, we have the production, retail sales and GDP data in China, followed by CPI prints in Germany and the US. Bernanke and Dudley top today’s Fed speaker list.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank