CAD Rebound To Lose Steam

 | May 26, 2016 07:22AM ET

Forex News and Events

Sell CAD (by Peter Rosenstreich)

Yesterday’s Bank of Canada meeting was interpreted as slightly less dovish than expected, providing CAD with a solid boost. The BoC held rates at 0.5% as widely expected and downgraded its short-term economic outlook as wildfires have forced the shutdown of several oil sand projects. The central bank’s preliminary assessment indicating that fires will chop 1.25% off the real GDP (considering the overall weak data) is likely to send the Q2 growth forecast into negative territory. However, logically the bank views the disruption as more of a temporary set-back, and so a full outlook for the economy and inflation will be provided in its next monetary policy report on 13th July.

The markets jumped on the statement with policy makers indicating that growth would rebound in Q3 as “oil production resumes and reconstruction begins.” In addition, the bank highlighted the housing market stating that “strong regional divergences,” and “household vulnerable” have grown. In our view the statement was dovish with removal of any reference to stronger exports and the “uneven” structural adjustment to the oil shock. We suspect that economic weakness will continue as the recent recovery in oil prices moderates and global headwinds expose Canadian commodity dependence weakness.

We anticipate that CPI inflation will ease from its current level of 1.7% y/y, severely missing the BoC 2.0% target. Weak growth outlook and deflationary fears should sustain the bank’s dovish stance. Canada is significantly exposed to monetary policy divergence with the Fed. We view USD/CAD pullbacks as an opportunity to reload on USD/CAD longs.

Russia, gaining positive momentum (by Yann Quelenn)

According to a recent survey of 37 economists, the Russian economy should shrink by 1% in 2016 vs. a previously expected contraction of 2%. The recent oil rebound is undoubtedly helping the country, which is heavily dependent on this commodity. A barrel of Brent is now above 50 dollars a barrel, representing a 7-month high.

The survey also indicates that inflation should remain high, around 8% y/y. Nominal wage growth has surged since the start of the year, which is adding upside pressures on consumer spending. We believe that this is a direct effect of a very weak rubble, however a newly strengthened ruble should weaken nominal wage growth. We also believe that the Russian central bank may intervene in the event of the ruble gaining too much in order to avoid damaging its GDP.

Later today, Russia will disclose its gold and forex reserves for the week ending May 20. Russia’s goal of reaching $500 million is getting closer with current reserves amounting to $390 million. Russia plans to remove the dollar, as much as possible, from its international exchanges in order to gain more credibility. This would also afford Russia a certain degree of protection against global uncertainties.