Article / 13 June 2017 at 7:42 GMT

FX Update: Canadian dollar rips higher on BoC comments — #SaxoStrats

Head of FX Strategy / Saxo Bank
  • CAD spikes as BoC waxes hawkish
  • Sterling caught up in Brexit uncertainty
  • Market looking for FOMC downgrade
The Canadian economy is gathering steam, says BoC deputy Carolyn Wilkins, and continued easing may not be the correct policy goal. Photo: Shutterstock

By John J Hardy

CAD leaped higher across the board yesterday after Bank of Canada deputy governor Carolyn Wilkins made positive comments on broadening sources of economic strength in the Canadian economy and questioned whether the central bank's very accommodative policy was appropriate. 

Canadian two-year rates jumped to price in about half a rate hike in immediate response and CAD was stronger across the board. Part of the impact of the rhetoric was due to the break below fairly clear lines of support in USDCAD, but given decelerating expectations of late for the Fed’s policy plans, the sudden shift in the opposite direction from the BoC was jarring. 

Sterling continues to trade near the last support levels against the euro ahead of the start of Brexit negotiations next week as prime minister May desperately tries to cobble together a government and despite the noise that a weaker mandate could mean a softer Brexit. 

The European Union is putting on the pressure, meanwhile, as a new proposal points to the EU forcing the clearing of euro-denominated derivatives to happen under the direct oversight of EU authorities and therefore on EU soil. 

It feels like the arm-twist is on to prevent Brexit from ever happening. Stay tuned... and Brexit negotiations may not even get started next Monday as was the original intention. EU officials fear that the UK leadership may not have the mandate to start the process.

Today’s calendar offers little to inspire as we all await the last couple of US data points tomorrow – May CPI and May retail sales – in the run-up to the Federal Open Market Committee meeting. 
The most hawkish scenario there is a Fed that plants its feet and insists on staying on course and looking through this patch of softer data, while the market is looking for a downgrade or conditionality in the forward guidance. More below.


The bottom fell out of USDCAD on the market’s reassessment of the forward potential for rate hikes from the Bank of Canada and as the sub-1.3400 support area gave way. The next two levels are readily evident – the prior 1.3250 support and then the massively contested 1.3000 zone. Hard to see the last of these giving way, but let's see how the pair navigates the 1.3250-1.3000 zone.

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Source: Saxo Bank 

The G-10 rundown

USD – the greenback is receiving little focus as subplots elsewhere are providing most of the energy. Over the FOMC, however, the greenback can’t escape notice, and we are at pivotal levels in a few USD pairs. The market in assuming the FOMC will make very few waves here as it awaits incoming data and defaults in the direction of caution. This would offer the USD little in the way of support, though it sets up a very low bar for hawkishness (most hawkish outcome would be a lack of tinkering with forecasts or the dot-plot and a continuation of the discussion on how to unwind the balance sheet).

EUR – the euro has eased lower against the rest of the G3 as consolidation and second guessing have dominated in the wake of the European Central Bank meeting and as a bit of asset market volatility hasn’t been particularly healthy (rotation into European equities a key driver of recent euro strength as interest rate spreads and peripheral considerations can’t entirely explain the euro’s resurgence).

JPY – the JPY remains in no-man’s land versus the USD between the recent lows and perhaps 110.50-75.

CHF – we’ve fallen asleep again here as Swiss National Bank sight deposits register a small rise and EURCHF goes nowhere. Zero expectations for a change of tune from SNB this Thursday.

GBP – the election aftermath continues to weigh on sterling as perhaps the final support layer in GBPUSD approaches between 1.2600 and 1.2500. EURGBP has been unable to maintain a pull through the important 0.8850 level on signs of a waning enthusiasm for the single currency elsewhere (particularly against USD and JPY).

AUD – AUD pulls back a bit higher versus the USD, perhaps in a bit of sympathy with USDCAD move, and Australian bank stocks rallied hard yesterday.

CAD – a big move on a comments from the BoC’s Wilkins – could prove a one-off for CAD unless oil prices get on the move again or until the next key Canada data points confirm the shift in potential. 1.3250 the next important area for USDCAD.

NZD – NZDUSD pushing on the highs of the cycle in a remarkably extended rally with the most shallow of consolidations. The NZ Q1 GDP report up just a few hours after tomorrow’s FOMC meeting.

SEK – 9.80 under pressure again ahead of this morning’s CPI, which will inevitably create a flurry of volatility. 10.00 is the ultimate line in the sand to the upside.

NOK – the influential Regions Survey today could set the tone for NOK.

Upcoming Economic Calendar Highlights (all times GMT)

  • 0730 – Sweden May CPI 
  • 0800 – Norway Regions Survey 
  • 0830 – UK May CPI 
  • 0900 – Germany Jun. ZEW Survey,  
  • 1230 – US May PPI 

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank


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