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.

Chart: USDCAD
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
Disclaimer

The Saxo Bank 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 Bank 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 Bank 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 Bank 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 Bank 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 Bank 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/legal/disclaimer/saxo-disclaimer)
- Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)


Boulevard Plaza, Tower 1, 30th floor, office 3002
Downtown, P.O. Box 33641 Dubai, UAE

Contact Saxo

Select region

UAE
UAE

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.