Canada Watch Daily
The National Bank of Canada | Mar 06, 2013 12:16PM ET
Canada Watch
Global equity markets have been buoyed by pro-growth announcements in the past 24 hours. In China, the outgoing premier called for a GDP growth target of 7.5% in 2013. In order to meet the objective, the government is expected to increase the budget deficit from Rmb 800 billion to Rmb 1,200 billion (or from 1.5% to 2% of GDP). Meanwhile in the Euro zone, finance ministers announced that they were open to a more lenient stance with regards to fiscal austerity. Such developments should bring support to the beleaguered Canadian dollar, at least in the short term. Following a string of dismal economic reports, the loonie has come under severe pressure in recent weeks. Speculators joined the party last week with an aggressive reversal in CAD positions. As today’s Hot Chart shows, the change - from 19,379 net long contracts to 21,433 net short contracts was the most abrupt on record, equivalent to a five standard-deviation move. At this juncture, speculators are short CAD by the most since early 2012. We note that the CAD is the only commodity currency that is actually being shorted by speculators (AUD, NZD MXN are characterized by net long positions). Such an occurrence had not been observed since 2006. The CAD does look oversold.
Overnight news came again from Australia where Q4 GDP was released slightly higher than expected at +3.1%. In his press conference, Australian treasurer was upbeat on the economy. However, he noted that the AUD was at sustained high levels, which might contain the recent rebound in the AUDUSD. 1.0298 is the level to watch.
What could the Bank of Canada (BoC) tell us this morning? Signs of weakness in the Canadian economy and an inflation rate under control could allow the BoC to drop its positive bias. In other words, it could stop saying that rate hikes are imminent. The BoC may wait for more signs of slowdown before it does so, but a single acknowledgment of the current soft patch could weaken the CAD. On the contrary, if the BoC keeps its tightening bias, the correction in the USDCAD could continue until Friday morning when both Canadian and US employment reports will be released. Olivier Cosialls
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