Date: 14 Jul 2017

As France’s BNP Paribas noted on Wednesday, Fed Chief Janet Yellen’s “bi-annual testimony to the House Finance Committee… was more dovish than the mid-June FOMC press conference in emphasising slightly greater uncertainty over inflation.” That’s arguably a fair reflection of how the currency markets saw matters. But as Dutch Bank ING wrote yesterday “testimony from Yellen [on Wednesday] was perceived as slightly dovish … largely on the view that the Fed was in no hurry to make further adjustments to policy.

This has allowed investors to focus on recovery and normalisation stories elsewhere in the world.” The Canadian dollar (USDCAD) fits that bill. Wednesday’s Bank of Canada (BoC) hike, with an accompanying tone which the market perceived to be hawkish, certainly gave the Canadian dollar (USDCAD) a substantial boost. But Canadian dollar bulls need to be aware, as Germany’s Deutsche Bank pointed out yesterday that “guidance for future [Bank of Canada] policy tightening appears to be firmly data dependent which was something also noted by Governor Poloz in his press conference.” Yet US bank Morgan Stanley remains a Canadian dollar

Yet US bank Morgan Stanley remains a Canadian dollar bull arguing that the Bank of Canada’s hike and the prospect that the Canadian central bank sees “this rate hike as a first step of more to come” given that “Canada’s leverage is leading to overheating concerns as the economy shows increasing signs of life.” means that “the CAD has further upside potential for now, especially within a globally yield curve flattening environment keeping funding costs muted.”  France’s Credit Agricole CIB takes a different tack altogether. “Still, even after factoring in the BoC rhetoric, the 1.5% rally in the CAD after the announcement looks outsized relative to a 5bp move in Canadian 2Y rates (the prior 40bp move in rates was accompanied by a 4% gain in the CAD). This suggests that FX markets were caught positioned short CAD before the decision, which suggests scope for some USD/CAD recovery once positioning is more balanced.” Traders might be interested to know that

France’s Credit Agricole CIB takes a different tack altogether. “Still, even after factoring in the BoC rhetoric, the 1.5% rally in the CAD after the announcement looks outsized relative to a 5bp move in Canadian 2Y rates (the prior 40bp move in rates was accompanied by a 4% gain in the CAD). This suggests that FX markets were caught positioned short CAD before the decision, which suggests scope for some USD/CAD recovery once positioning is more balanced.” Traders might be interested to know that

This suggests that FX markets were caught positioned short CAD before the decision, which suggests scope for some USD/CAD recovery once positioning is more balanced.” Traders might be interested to know that currently, Credit Agricole retains a C$1.40 forecast for September 2017.”

Traders will have their own views on that. As for ING it now looks for “USDCAD to consolidate in the 1.2750-1.2950 range over the near-term” but feels there are “risks that the pair trades closer towards the top of this range. ” Traders might also be interested to know that the Dutch firm now expects Canadian inflation data, due July 21, to now assume greater market importance and feels that if that data disappoints then USDCAD could “see a sharp correction towards C$1.30.”

Written by Neal Kimberley, External Currency Analyst.