USD/CAD to be guided by the BoC’s stance – Deutsche Bank

Sebastien Galy, Macro Strategist at Deutsche Bank, suggests that the point at which the Bank of Canada changes its stance largely determines the path of USD/CAD.

Key Quotes

“We had assumed that without NAFTA or BAT, USD/CAD would be around 1.35 to finish at 1.28 in 2018. Given the robustness of the Canadian business cycle, the 2017 Q4 and 2018 Q4 forecasts are at risk of a downward revision.”

“To forecast USD/CAD with sensitivity analysis is both informative and misleading. We estimate a single rate hike by the Bank of Canada has a -3.7% impact on USD/CAD, a side effect of how tightly correlated the Canadian and US business cycles are. Nonetheless, this suggests that Bank of Canada tightening could have a sizable impact on USD/CAD in 2018 as little to no tightening is expected. As regards to timing, the trough of a currency is typically driven by the corresponding one in forward interest rates and is hence increasingly likely in the second half of the year.”

“Tactically a less dovish Bank of Canada on Wednesday would push USD/CAD down to 1.32. We can rely on recent history to assess this with a quantile regression model. It calculates the impact of interest rates differentials and oil under various regimes or quantile. For example, in the recent past when the Bank of Canada was expected to turn less dovish, USD/CAD traded often enough at the 5% quantile or 1.32.”