Morgan Stanley Trade of the Week: Buy EUR/CAD

We recommend shorting CAD into the BoC meeting as we are expecting a more dovish tone than the market is priced for. Economic data have continued to disappoint, with trade data this week showing real non-commodity exports falling 2% in May, now 8% below their January peak. This, along with the wildfires and weaker-than-expected consumption, point to contracting 2Q growth after a decent 1Q. The 2Q Business Outlook Survey showed that firms expect weaker future sales, led by declines in foreign demand, while Brexit and other external shocks cloud the outlook as well. The BoC has maintained a constructive tone despite these developments, but given its reluctance to change views between MPRs, we believe that July’s meeting provides it the opportunity to do so. With new forecasts likely to push back the estimate of output gap closure, it will be hard for the BoC to sound too bullish about the recovery. We like selling CAD against EUR as we don’t see any imminent catalysts for a weaker EUR. Absent aggressive easing by the ECB, we expect the eurozone’s current account surplus to dominate.

We like to buy EURCAD at market with a target of 1.5000 and stop at 1.4000.

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