Canada: Will the loonie's wings get clipped? - TDS

Mazen Issa, senior FX strategist at TD Securities, notes that the CAD has found its bid again and the break below 1.3280 support in USDCAD is notable in their view.

Key Quotes

“There appears to be a small monetary divide; on the one hand, Powell has acquiesced to the market narrative of easing, but on the other, Poloz appears content that the cyclical drag has ebbed which will – all things equal – not necessitate lower rates from the BOC over the near horizon. The latter is supported by a stronger-than-expected inflation print, which the market has taken and ran with in peddling a CAD appreciation theme.”

“At the same time, we do not think the BOC would necessarily stand pat while the Fed lowered rates. This then becomes a test of the BOC's pain threshold for CAD strength. On this basis, we think the BOC would likely need to respond but the pace and magnitude may differ. This may finally re-ignite the beta to 2yr rate spreads, which has been dormant for much of this year despite a near 50bp compression in US/CA spreads since the March highs.”

“For now, we think the G20 will be the next major event risk for the CAD. Until then, we think the confluence of factors that favor riding the momentum of the CAD despite muted betas with an eye towards 1.30 as the next major reassessment point.”

“The fact that the CAD is also the next high yielder behind the USD in the G10 also bodes well for momentum performance to persist. We think this should help fuel CAD gains on crosses as well - EUR and AUD in particular.”