BoC taking the sting out of the CAD's tail - Nomura

Analysts at Nomura explained that the BoC’s more watchful stance at the October meeting with respect to the pace of future rate hikes has taken the sting out of the CAD’s tail. 

Key Quotes:

USD/CAD moved through 1.29 after today’s weak GDP report, though this negative surprise was mostly due to a chemical plant shutdown. 

Based on the BoC’s heightened data dependence, the CAD should remain sensitive to incoming economic releases, with September trade data and the October employment report (both released 3 November) the next major signposts. 

And while downward surprises in the data should exert some more near-term downward pressure on the CAD, we think that most of the adjustment in the currency because of the domestic economic narrative now looks to be in the price. 

Underscoring this assertion, the Canadian economic data surprise index is back in negative territory and is now tracking at its lowest level since early November 2017. 

In addition, Canadian 2yr swap rates have retraced about half of the rise observed over September as the market has adjusted to the banks more cautious policy outlook. 

When combined with our core bearish USD narrative, we have doubts that a further large or sustained rise in USD/CAD is in train. 

The outlook for further BoC rate hikes, albeit in an elongated cycle remains, and oil prices stay supported. 

Indeed, our USD/CAD estimate, which incorporates oil prices and the US-Canada 2yr swap spread differential, is now suggesting that the recent rally may have overshot the fundamental drivers. As a result, we think it is prudent to close out our short-dated USD/CAD 1.2750/1.2900 call spread a little early, locking in a 3.23 times return based on our 0.23% entry cost."