Derek Halpenny, European Head of GMR at MUFG, suggests that the Canadian dollar may well be volatile today in response to the updated monetary policy outlook provided by the Bank of Canada in its quarterly Monetary Policy Report.
“With the BoC likely to maintain an unchanged policy stance, CAD direction will come from any changes contained in the MPR. The CAD has recovered some poise recently in response to some better than expected economic data and the stability of crude oil prices just above the USD50 p barrel level. In particular that surge in jobs in September reported earlier this month has raised optimism over the outlook for growth. There were 67,200 jobs created in September, the largest total since April 2012. Permanent jobs have now increased by 94,800 so far in 2016, up markedly from just 14,300 in the same period of last year. The 2-year CAD swap rate has jumped 12bps this month on better economic news. Add to that the demise of Donald Trump in the opinion polls and you have a recipe for some turnaround in the negative sentiment that has helped support CAD of late.
The last MPR in July included a 0.4ppt forecast cut in real GDP for this year from 1.7% to 1.3% reflecting the impact from the forest fires in Alberta. Real GDP contracted by 1.0% in Q2 as a result but the market expectations is for a 3.3% rebound in Q3, similar to the BoC’s projection of 3.5%.
In that sense the MPR today should not incorporate any marked change in outlook for real GDP growth or on the timing of closing the output gap which in July was estimated to be fully closed “toward the end of 2017”.
A neutral MPR and statement by the BoC may prove supportive for the CAD over the short-term given the momentum in recent days has been positive in the aftermath of recent positive economic data. However, we still believe beyond perhaps the nearterm positive response to the MPR that the USD/CAD rate will drift higher. The key driver will be developments on the US side. A Clinton victory in the election coupled with US data that confirms a rate hike in December along with our view of limited further upside for crude oil prices all suggest renewed upside for USD/CAD before year-end. The one-year daily correlation between USD/CAD and the 2-year nominal yield spread is high at present (0.78) but we do not expect BoC developments today to provide any further significant shift in spreads in favour of CAD.”
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