BoC reliant on weakness in CAD - ING

Viraj Patel, FX Strategist at ING explained, in respect of the BoC coming up this week, with the policy rate likely to remain on hold, front-loaded CAD weakness is even more crucial for a central bank deeply reliant on export-led growth.

Key Quotes:

"With the policy rate likely to remain on hold, front-loaded CAD weakness is even more crucial for a central bank deeply reliant on export-led growth.

The Jan MPR revealed that net exports is expected to account for a sizable chunk (1.4ppts) of 2016 GDP growth. The 10% rally in the trade-weighted CAD since the 20 Jan meeting will be a concern for policymakers, although part of the strength can be justified by a recovery in oil prices (and risk sentiment). Indeed, our short-term model indicates that USD/CAD is currently trading close its estimated fair value (1.3200/50). 

The repricing at the short-end of the CAD curve has also played a role, with the 2Y yield rising by 27bp since bottoming in mid-Jan. A more cautious BoC, one that follows the Fed in citing concerns of financial conditions, will see local rates (and the CAD) nudge lower."