Richard Franulovich, Head of FX Strategy at Westpac, points out that CAD remains a notable underperformer since the BoC’s more hawkish and determined message Oct 24 when they jettisoned gradualism with a more medium term focus on returning policy back to a neutral stance.
“The sharp breakdown in energy prices, from 4-year highs less than a month ago to within sight of fresh 2018 year to date lows is likely among one of the key factors. That is aggravating yet further CAD’s already notable undervaluation vis-à-vis yield spreads (EUR/CAD a notable example).”
“Democrat gains in the midterms unlikely to completely upset NAFTA 2.0, though its path through congress is tougher.”
“Markets continue to underestimate the BoC’s determination to normalise. BoC staff estimates of neutral imply +125bp in BoC hikes versus market pricing for +70bp through to Dec-2019.”