CAD: Continue to see topside risks – RBC CM

George Davis, Research Analyst at RBC Capital Markets, explains that February was a very uneventful month for USD/CAD, with the pair largely confined to a narrow 1.3000-1.3200 range for most of the period but thy continue to see topside risks remaining prevalent through Q1 and Q2 as policy divergence will lend support to the USD.

Key Quotes

“From a domestic perspective, the BoC has been steadfast in emphasizing that core inflation measures are pointing to “material excess capacity” in the economy. In addition, despite the creation of 239K jobs over the last seven months, slowing wage growth underpins the Bank’s contention that there remains significant slack in the labour market. To wit, average hourly earnings for permanent workers grew at just 1.0%y/y in January.”

“Moreover, weak non-energy export growth and tepid private investment intentions continue to dent the Bank’s rotation thesis as these foundations for sustainable growth have proved elusive. Add to that the uncertainty and downside risks that revolve around US government policy (rising protectionism and tax reform) and it points to a central bank that will maintain a cautious stance and keep rates on hold through 2017. This contrasts with the US, where firm economic growth is expected to push the Fed to tighten policy further this year. This policy divergence is expected to serve as a bullish factor that pushes USD/CAD toward 1.35 in Q1 and 1.38 in Q2.”

“Technically, the recent break above 1.3212 to begin the month of March favours additional gains toward 1.3461 initially, followed by the 1.3600 region.”