Market Analysis

Canada’s Day

Wednesday heralds the latest policy decision from the Bank of Canada (BoC) and US firm Morgan Stanley, for one, feels that the Canadian dollar has further room to strengthen versus its US counterpart. The US firm believes that while the combination of last week’s weak US payrolls data and strong Canadian GDP had already created an environment in which USDCAD would head lower, the outcome of today’s BoC meeting may merely encourage such a move.

While Morgan Stanley expects “the BoC to remain on hold” today it also expects the Canadian central bank to “strongly signal a rate hike in October and maintain a bullish and optimistic view.” Consequently, the US firm argues “the balance of risks point to CAD appreciation after the meeting” because, in Morgan Stanley’s view, “the market has fully priced in a hike by the October meeting and thus a failure to hike in September would have limited impact on the subsequent rate path. However, should the BoC elect to surprise markets by hiking, it would indicate that they are behind the curve and may lead to a significant repricing of the rate path. This creates asymmetric USDCAD
downside risks.” It’s an interesting hypothesis that traders might wish to consider even if they disagree with the argument.

Written by Neal Kimberley, External Currency Analyst.