CAD Bulls Push Ahead
Our bullish call on the Canadian dollar was supported by the more hawkish posture of the Bank of Canada, which warned that “in light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2 per cent inflation target over the medium term”. This shift was the key driver of our USDCAD forecast revision last week (to 0.98 from 1.03 on a three-month horizon). Note that we are also long a CADCHF call spread. The statement tees up a possible upgrade to the GDP forecast in the Bank’s quarterly Monetary Policy Report due later today. The more hawkish stance of the Bank of Canada certainly stands out at a time when most other major central banks are retaining an easing bias. Indeed, yesterday’s RBA minutes sounded slightly more dovish than the policy statement itself, reinforcing our expectation for a May rate cut – inflationary data permitting. Later today, the BoE minutes will be closely monitored for any fresh insights. While a unanimous decision is expected on rates, we expect a 7-2 vote split on QE, portending a close decision at the May MPC meeting. For the record, our UK economics team believes the MPC will not expand the QE programme next month in the face of inflation figures that continue to exceed the BoE’s forecast, but the upcoming Q1 GDP data and Eurozone developments could still have a significant bearing on the debate. The Riksbank meets today and we expect the repo rate to be left unchanged, though the policy statement will be fairly dovish, with little inflationary pressure inside Sweden. The stronger than expected ZEW figures and decent Spanish bill auctions offered some support for the euro, but the upside should be capped by political risks heading into the first round of the French presidential elections on April 22 and the need for continued policy accommodation from the ECB, underlined by the IMF’s call for lower rates. With risk appetite looking better for now, the yen will have room to retreat, especially given the risk of further BoJ easing via a JPY5-10 trn expansion of the APP on April 27 – despite today’s press reports indicating that the Bank’s inflation forecasts may be raised, as they will still fall short of the 1% ‘goal’. Our three-month USDJPY target remains 85.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank