FX Update: BoC joins RBA in renewing tightening regime. FX Update: BoC joins RBA in renewing tightening regime. FX Update: BoC joins RBA in renewing tightening regime.

FX Update: BoC joins RBA in renewing tightening regime.

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  The Bank of Canada cleared the bar of hawkish expectations and hiked rates yesterday, following that up with fairly hawkish guidance. USDCAD is probing lower on the news and on a weak jobless claims figure out of the US today, but it is difficult to see the relative forward BoC versus Fed expectations curve widening notably from here.

Today's Saxo Market Call podcast

FX Trading focus:

  • CAD reaction shows much was priced into FX, even as Canadian rates jumped aggressively
  • Choppy USD action suggest opportunities will be difficult to trade until next Tuesday’s US CPI and the Wednesday FOMC meeting are out of the way.

Trading and bias notes:

  • CAD: the modest reaction to the Bank of Canada hawkish surprise in USDCAD suggests the market was looking for hawkish outcome (FX reaction far more muted than in rates). CAD strength on the relative repricing of the forward rates curve may be peaking here – will need new factors for CAD strength to extend (improving global outlook, energy prices, etc.).
  • AUD: the AUDUSD pair still in limbo as the attempt above 0.6680-0.6700 resistance was repulsed yesterday even as AUD strength still felt elsewhere (AUDNZD has tested most of the way to the 1.1088 resistance). Ditto above comments for CAD on relative repricing of RBA forward curve.
  • USD: choppy market here with slight bias for long positioning, but risk/reward difficult ahead of an important week next week. Jobless claims weak, but this can be USD neutral if risk sentiment wobbles broadly.
  • JPY: perhaps even more critical week ahead for the JPY as the more hawkish RBA and BoC have the yen on the defensive, while longer US treasury yields have also jumped higher again. Both FOMC and Bank of Japan up next week.

Bank of Canada: surprise consensus with hike plus hawkish guidance.

Especially in terms of the forward rate expectations, the Bank of Canada delivered a surprise yesterday in its decision to hike 25 basis points and deliver a hawkish statement on further hikes to come. It was the first BoC rate hike since January. Governor Macklem had made the point recently that his concern level is rising on the bank’s ability to take inflation back to the 2% target, with the last percentage point below 3% the hard part of the journey. The statement noted stickier than expected core inflation and a rise in housing prices and “other interest rate sensitive goods”.

Particularly in relative terms to the Fed, the forward policy curve expectations for the Bank of Canada now after this meeting look about as hawkish as possible through the end of this year. We even got a small extension today on release of the US weekly jobless claims (261k and a new cycle high if it holds post-revisions). The Fed is priced for a likely further 25 basis points of hiking in June or July followed by a removal of that hike and a bit more by the end of the year, while the Bank of Canada is priced to hike another 30+ basis points through December. The two-year US-CA yield spread has fallen to the lowest since a year ago to about -35 basis points, with the year-forward Canadian STIR future suggests a policy rate some 20 basis points lower than the current one, while the year-forward US SOFR future is priced for more than 100 basis point slower Fed rates. Hard to see a significant extension wider in this spread. If the US is in recession and the Fed is cutting, the BoC won’t be far behind.

USDCAD fell further yesterday, but the drop was modest relative to the strong 20 basis point surge in Canadian two-year rates on the back of the decision to hike yesterday and guidance for more policy tightening to come. Given our base case that it will prove difficult for the forward expectations curve for the BoC to continue pricing in more relative tightening than the Fed from here, it may prove difficult for USDCAD to work down through the next layers of support, which start at the pivot lows in recent months near 1.3300 and extend to the low of the year around 1.3261 and then the lows of late last year at 1.3222.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
While AUD and CAD are stand outs on strong side, these currencies’ strength may be peaking soon, at least as a function of the shift in the policy outlook. Elsewhere, big week ahead for the US (CPI and FOMC), sterling on labor market data next Tuesday, and JPY on any moves in especially US yields next week plus the Bank of Japan meeting next Friday.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Some wild readings in AUD and especially CAD pairs on this mini-theme lately of renewing the rate hike cycle from the RBA and the Bank of Canada – looking at you CADSEK and you AUDSEK and AUDNZD.

Source: Bloomberg and Saxo Group

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 07

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article
  • The rise of populism: Far-right parties will influence the future

    The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.

    Read article
  • Investing in China: Navigating Q1 amid economic challenges

    Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.

    Read article

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.