USD/CAD drop towards 1.2000 seems plausible over short-term – BTMU

FXStreet (Barcelona) - Derek Halpenny, European Head of GMR at Bank of Tokyo-Mitsubishi UFJ, argues that with Poloz’s January insurance limiting the impact to economy from oil shocks, and crude prices moving to the upside, further CAD demand is possible, hence a USD/CAD drop towards 1.2000 looks likely.

Key Quotes

“As we signalled yesterday, the message presented by the Bank of Canada in its Monetary Policy Report and press conference by Governor Poloz was that the oil price shock to the economy was bad but manageable.”

“The key according to Poloz was assessing the size of the oil shock. While he was surprised by the speed of which it hit the economy, the size of the impact might not be as bad as thought.”

“Indeed, while GDP this year was revised lower due to the hit, the BOC actually raised its forecast for GDP next year from 2.4% to 2.5%.”

“He concluded that based on their assessment that “we have the right amount of insurance”. Of course if the shock proves bigger then additional easing may be needed but that doesn’t appear the view currently at the BOC.”

“The 2-year swap spread has moved further in favour of CAD in the aftermath of the BOC MPR release and with crude oil prices at a year-to-date high, the recipe for further CAD demand is certainly there.”

“A drop to 1.2000 seems plausible over the short-term but once US dollar demand is revived as US data picks up, we would expect some of the USD/CAD decline to reverse.”