A notably less hawkish BoC and heightened global trade anxieties are proving highly toxic for CAD, but markets are exaggerating both risks, according to Richard Franulovich, Research Analyst at Westpac. 

Key Quotes

“BoC pricing has softened (from +55bp  end-2018 to +44bp), Poloz noting there may be more spare capacity and that the BoC is obliged to let the “capacity building” play out. Yet the BoC’s formal communication is that the economy is “operating near capacity”, financial conditions remain easy and US growth is firming. BoC should hike rates by mid2018 and again before year’s end. Our Canada surprise index warns negative sentiment could be overdone and due for a bounce soon.” 

“NAFTA/tariff risks overdone too, Canada earning an exemption for steel and aluminum tariffs and the US apparently dropping a contentious demand all auto imports from Canada contain at least 50% US content. USD/CAD is unlikely to see sustained strength in the 1.30-1.35 zone.”