Forex Institutional Research: Deutsche Bank FX Daily
Key quotes from the report:
What If The Bank of Canada Cuts?
Even after a ten percent rally in the Canadian dollar against the US dollar, the market expects the Bank of Canada to stay on hold this Wednesday. It is to some extent perplexing as the Bank of Canada has taken pains to emphasize the importance of a weak currency in a post oil boom. Canadian growth is driven in good part by a weak currency and crucially the implicit promise that this weakness will last for a considerable amount of time. This condition is necessary but not sufficient as Canada still needs strong demand south of the border. Exports of auto have been strong and encouraging over the past few months courtesy of the US consumer.
Levered accounts may want to reduce long CAD positions ahead of the Bank of Canada decision as they are particularly at risk. Assume the Bank of Canada surprises the market with a twenty five basis point rate cut and some implicit guidance on the currency, levered accounts would be squeezed. Otherwise positioning across other agents is relatively light based on our CORAX report, CFTC and option data on the DTCC. Statistically USDCAD would jump 2.2. big figures higher (e.g.1.34 to 1.3620) based on intraday data.
Our economists expect the Bank of Canada to stay on hold. Eventually though the widening in policy differential with the Fed should drive USDCAD to our forecast of 1.40 for Q2. We are already long USDCAD at 1.3540 having set the knock in level too high.
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