Bank of Canada preview – "Canadian growth shocker confirms … pause" – CAD forecast

<p>The Bank of Canada meet on Wednesday, 6 September 2023. The decision is due at 1400 GMT, which is 10 am Eastern time. The consensus is for the Bank of Canada to hold its key interest rate steady at 5.00%.</p><p>Preview comments from ING (this in brief from a longer piece):</p><ul><li>Canada’s economy surprisingly contracted in the second quarter with consumer spending slowing sharply and residential investment collapsing. Together with a cooling labour market, this should ease the Bank of Canada's inflation fears and lead to a no-change decision on 6 Sep.</li></ul><p>ING on implications for the $C:</p><ul><li>While USD/CAD rose in the past month from 1.32 to 1.36, the USD:CAD two-year swap rate differential was relatively stable in the -50/-40bp range throughout August, and only tightened to -30/-35bp after Canada’s poor 2Q GDP report.
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Our short-term valuation model, which includes swap rate differentials as an endogenous variable, shows that USD/CAD is trading more than 2% over its fair value, a rather unusual mis-valuation level for the pair. Incidentally, CFTC data shows that speculators have moved back into bearish positioning on the loonie in recent weeks, with net-shorts now amounting to 9% of open interest.</li><li>We don’t expect the BoC to turn the tide for CAD, but the recent weakness in the loonie appears overdone, and technical indicators suggest a rebound is on the cards. </li><li>We still expect USD/CAD to end the year close to 1.30 as CAD should benefit from the most attractive risk-adjusted carry in the G10, even without any more hikes by the BoC.</li></ul>

This article was written by Eamonn Sheridan at www.forexlive.com.