16 Jul 2014
Why has CAD diverged from interest rates? -BAML
FXStreet (Guatemala) - Analysts at Bank of America Merrill Lynch explained that USD/CAD has diverged with interest rate differentials recently.
Key Quotes:
“10-year yield spreads implying USD/CAD should be trading near 1.10 versus its current spot level around 1.0760. It is not uncommon to see divergence, but its sustainability will have important implications for our longer-term USD/CAD forecasts”.
“A fundamental assumption of these forecasts is growth and policy divergence between the US and Canada with our year-end interest rate forecasts implying a widening of 10-year interest rate differentials to 60bp”.
“The recent divergence between interest rate differentials and USD/CAD will prove temporary with interest rate differentials reasserting themselves as a key factor driving USD/CAD once the impact of recent temporary factors subside, in our view”.
“In particular, short-CAD position capitulation following a large downside surprise in 1Q data on the back of an extreme winter, and a more recent rise in Canadian inflation prompted the market to, prematurely in our view, question the durability of Bank of Canada (BoC) Governor Poloz's focus on low inflation. Instead, while Governor Poloz may need to take a tactical retreat from his inflation risks language, the overall tone of policy will remain highly accommodative with the BoC's eye squarely on exports”.
Key Quotes:
“10-year yield spreads implying USD/CAD should be trading near 1.10 versus its current spot level around 1.0760. It is not uncommon to see divergence, but its sustainability will have important implications for our longer-term USD/CAD forecasts”.
“A fundamental assumption of these forecasts is growth and policy divergence between the US and Canada with our year-end interest rate forecasts implying a widening of 10-year interest rate differentials to 60bp”.
“The recent divergence between interest rate differentials and USD/CAD will prove temporary with interest rate differentials reasserting themselves as a key factor driving USD/CAD once the impact of recent temporary factors subside, in our view”.
“In particular, short-CAD position capitulation following a large downside surprise in 1Q data on the back of an extreme winter, and a more recent rise in Canadian inflation prompted the market to, prematurely in our view, question the durability of Bank of Canada (BoC) Governor Poloz's focus on low inflation. Instead, while Governor Poloz may need to take a tactical retreat from his inflation risks language, the overall tone of policy will remain highly accommodative with the BoC's eye squarely on exports”.