It's been a very subdued start to the week due to UK and US public holidays; but the lack of movement in currency markets is perhaps surprising considering it's been another weekend dogged by credit downgrades to Spain's AAA status by Fitch, and indeed new worries about France's resilience to dreaded ratings agency downgrades. With the underlying discontent in Europe still showing no credible signs of letting up, investors can expect EUR rallies to be labored, and whilst a positioning correction could indeed come any day now, we still favour selling after rallies rather than trying to ride them higher. Whilst low liquidity makes for slow trading this Monday morning, there is still a decent itinerary of economic data coming up both today and tomorrow that could spice things up. The main focus for us will be on Canadian quarterly GDP (Q1) which is expected to accelerate to 5.8% QoQ annualized compared to the previous 5.0%reading. Recent comments from BoC Governor Carney suggested that Q1 growth was ticking above the bank's original forecasts, and the timing of the release is made all the more significant considering that tomorrow brings the BoC's latest rate decision. Given the strong recovery in Canadian fundamentals, the prevailing dovishness from the BoC had been a cause of some frustration and bewilderment in recent months, but last month's meeting did give CAD bulls some tantalizing bait. Recall that in the previous statement accompanying the on-hold decision, the central bank chose to drop its conditional commitment to low rates until the end of June - an omission that has now prompted consensus predictions to be for a hike of 25bps to 0.50% this time around. We do like CAD as one of the most likely currencies to perform robustly in the remainder of the year, but with a hike already priced in for tomorrow, there is clearly some scope for disappointment. As with many risk trades (and particularly as a commodity currency), there are big caveats for the CAD outlook should the economic problems dogging Europe and fragile global recovery deteriorate once more, and given the BoC's penchant for being cautious coming out of this recession, expect significant CAD selling should they keep rates on hold and adopt the wait-and-see strategy.
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