CAD: Gravitational pull towards 1.27 OECD PPP level

Analysts at ING explain that the combination of a conservative Poloz and flat GDP growth in July has seen a dovish BoC reality check in CAD markets.

Key Quotes

“We think the story still has legs to run - with markets continuing to price in a 55-60% chance of a Dec hike. The rhetoric from Governor Poloz last week suggests that there is no pre-set path for BoC policy - which puts the pace and extent of future tightening under greater scrutiny.”

“The second-round effects of a strong CAD and sharp appreciation in financial conditions may come back to haunt the BoC and keep them at bay. We suspect there is at least 25bps worth of downside to the 2-year market-implied policy rate of 1.75% (current 1.00%). With BoC policy highly data-dependent, the focus this week will be on PMI data (Fri), trade (Thu) and most importantly the Sep jobs report (Fri). Risks are skewed towards data-led CAD downside and we continue to view the OECD PPP fair value of 1.27 as a medium-term anchor point for USD/CAD.”

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