From the FXWW Chatroom – The pullback in CAD following last week’s softer than expected retail sales and consumer price readings represents a buying opportunity: The pullback overstates the extent to which the data is likely to alter the BoC’s course at its policy meeting this week. The broader trajectory in Canadian data remains robust, with optimism evident in the recent Business Outlook Survey even ahead of the announcement of the USMCA. Given that some of the worst market fears on intensifying trade risks have failed to play out, this means that the BoC will most likely maintain relatively optimistic language, hiking rates and sticking to the gradual hike mantra. Particularly with Canadian interest rate expectations trading off of recent highs, this is more likely to validate market pricing on the BoC being among the most hawkish global central banks than undercut it. This would leave CAD well positioned to strengthen on the crosses, with the currency potentially benefiting from increased risk discrimination.
Flows suggest hedge funds cautious on the BoC: The shift in the pattern of leveraged sector flow towards the end of last week supports the view that the market may be leaning too dovish on the BoC. On a four-week rolling basis, the leveraged sector shifted to selling CAD. Since this follows a period of CAD buying, it suggests that short-term investors were paring back longs and there may now be more scope for renewed buying on BoC hawkishness.
CADNOK represents an attractive vehicle for CAD longs: The pair is more risk and oil neutral and the Norges Bank looks less likely to surprise on the hawkish side. We do not expect fireworks from the Norges Bank for three reasons: 1) It’s a non-MPR meeting 2) The guidance following the hike at the last meeting was cautious 3) There has not been enough data since the last meeting to move the needle.
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