USDCAD back from the brink after surprise Bank of Canada comment

The Canadian dollar jumped back from the brink following the Bank of Canada’s post rate announcement statement.  The USDCAD rate had been bid up in anticipation of a more dovish comment but what they got was quite the opposite.  Not only did the bank keep the reference to rate hikes (“Over time, some modest withdrawal of monetary policy stimulus will likely be required”) they added another concern (“while the household debt burden is expected to rise further before stabilizing by the end of the projection horizon’). Tomorrow’s Monetary Policy Report will likely explain the concerns in more detail.

The short term USDCAD rally from 0.9760 on October 17 ended abruptly this morning with the US dollar drop below 0.9940 but the failure to retrace below 0.9880 suggests that the bullish USD bias may continue. This view is supported by the fact that US dollar short positions are very extended while at the same time the “bullish CAD" story has gotten stale.  In addition, the lack of progress in the European debt negotiations, the “lame duck” US administration and very soft global equity indices all suggest that we may be entering a period of global risk aversion.  In addition, there are reports of good sized stops and option barrier triggers lurking above 1.0010.  A break above 1.0040 argues for a return to the 2012 peak of 1.0440.

On the other hand, the FX markets have been jumping on and off the risk bandwagon, all year which suggests that this latest turn may be short lived. At any given time,  better-than-expected data from China or an improved growth outlook in the US or a positive headline from the Eurozone will make all the gloom dissipate.

For now, it looks like the USD/CAD will bounce within a 0.9880-0.9980 range.