Price action in equities and USTs during the Asian and London morning sessions suggest ‘risk off’. We suspect participants have been watching moves in CNY closely. The recent activity in the CNY suggests PBoC is aiming for more ‘two-way’ flows which are directly linked to macro economic developments. CNY ‘distress’ is therefore unlikely, but CNH vols probably need to settle down a bit first before participants move away from this area of focus.
Technically speaking, USDCAD’s abrupt ‘failure’ near 1.120 (inverse hammer) on Friday and yesterday’s move lower should be enough to keep aggressive USDCAD buyers to the sideline for the time being. Although our economists are expecting a -0.5% sub-consensus print for December GDP (Friday), there is room for more long USDCAD liquidation this week if data surprise to the better. We look for these liquidation risks to increase on a break of 1.102/5-1.105 support, but short-term FX investors should initially look to buy the dips into that range first.
Medium-term downside CAD risks still dominate, but the appetite to aggressively add to CAD shorts above 1.095-1.100 should remain limited for now. January CPI suggests some pass-through from the weaker CAD is already in play, and expectations for BoC rate cuts during the remainder of the year are basically nil again, according to the OIS curve. This is probably because weather has played a very big role in recent Canadian data weakness. More time will be needed to determine which portion of the weakness is due to the weather, and which is not. Additionally, Canadian equities have outperformed their US counterparts so far this year, and the oil price still says the CAD is moderately undervalued. We currently look for very good resistance in USDCAD at 1.113-1.115 to persist through the GDP data on Friday.
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BMO