Nervy Loonie As BoC Meets
The Bank of Canada decision on Wednesday could prove to be one of the most decisive for the currency in recent memory. The weakness in data driven by correcting domestic imbalances has intensified of late, and although the market is looking for policy rates to remain unchanged, we see a strong chance that whatever is left of the central bank’s tightening bias will be swept away in entirety. As such, we choose to remain defensive on the CAD heading into Wednesday’s decision. We note that the rates market is barely pricing in any easing at this point. This has also led to limited downside interest being reflected in FX options markets, while on the whole the CAD still enjoys favourable positioning. As such, risk: reward in pricing for a qualitative shift in the BoC outlook, and favour being short-CAD trades driven by policy/growth differentials (AUD, SEK) and positioning (NOK, EUR).
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UBS