Date: 04 Jul 2018

“We’ve said clearly that, given where the economy is, we’re in a situation where the economy will warrant higher interest rates”, said Bank of Canada (BOC) Governor Stephen Poloz last week and the market odds of a rate hike on July 11 subsequently went above 70 per cent. As the currency market is equally attuned to the mood music emanating from the BOC, traders might legitimately assume that such an outcome has now also been factored into the USDCAD exchange rate. Indeed, writing Tuesday, France’s Credit Agricole opined that, while not ignoring the ability of trade tensions to hold the CAD back, “the well-supported rate outlook will prove the CAD’s predominant driver.” With that in mind the French firm sees USDCAD at 1.32 in September but 1.29 in December and 1.27 in March 2019. Traders might think that’s a perfectly reasonable forecast but others might wonder if, at least in the short term, it does underplay that tenser Canada-US trade relations could undemine the CAD. Canada’s TD Securities, also writing Tuesday, felt the CAD is “looking like a sell as trade risks [are] underpriced” and that “despite the rally observed in the CAD last week, it remains a deeply unappealing currency.” TD argues that this “With a rate hike all but certain at this point, incoming data will unlikely be the arbiter of the CAD’s near-term trajectory,” and so while this week’s Canadian jobs data will attract attention it shouldn’t alter the CAD’s “prospects over the coming weeks.” TD Securities feels the trade risks will be the more influential factor shaping the CAD’s trajectory and that the situation “gets worse before it gets better again” especially as US President Donald “Trump has already given an indication that he plans to leave NAFTA until after the mid-terms.” With TD also of a mind that the CAD could also fall victim to a worsening of China-US trade relations, it’s perhaps no surprise that, in sharp contrast to Credit Agricole, the Canadian firm sees USDCAD at “1.35 over the summer” and even felt 1.3150 was an interesting entry level to benefit from such a move higher in USDCAD. It remains to be seen whether traders will agree.

Written by Neal Kimberley, External Currency Analyst.