CAD: Back To You Greenback - Credit Agricole

The BoC provided no fireworks in its policy statement, sticking largely to the script laid out over the past few months.

For one thing, the BoC maintains its upbeat outlook for the Canadian economy. This reflects their hopes that exports and business investment will lead the recovery over the coming quarters. They have also placed a lot of stake in a solid US recovery, reiterating hopes that Canada returns to ‘solid growth’ in Q2 after a weak Q1.

For another, the BoC noted that financial conditions remain accommodative, implying that the mild appreciation in CAD since the last meeting is not too worrying. Indeed, putting into context the recent CAD rally, it noted that the recovery in oil and selloff in the greenback were the key drivers behind the recent rally. We think this suggests that even though a stronger exchange rate poses downside risks to its outlook, they don’t envision a sharp rally from here.

All told, the statement noted that the economy looks largely in line with April MPR, reaffirming the BoC’s neutral approach. Still, we think the BoC growth’s outlook for Q2 and Q3 (1.8 and 2.8%) appears too optimistic, which could challenge this neutral tone later in the year.

For now, this suggests that US rates and oil prices will underpin USD/CAD with the broader trend in the USD likely in the driver’s seat in the very near-term. Technically, USD/CAD made a convincing break of the 100dma and we also note the cross of the 100dma and 50dma could see the single currency test the upper end of its recent range near 1.26 soon.

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