USD/CAD is a buy around 1.28 – Deutsche Bank

Sebastien Galy, Macro strategist at Deutsche Bank, suggests that the USD/CAD is a buy around 1.28 following a more hawkish tone from the Bank of Canada, targeting 1.40.

Key Quotes

“The loonie is the only major currency up versus the dollar since Donald Trump was elected. Higher oil prices drove the loonie eleven cents higher, though eight of these were lost to rising Fed tightening expectations. This held with pre election sensitivities. Post election, the correlation with oil prices rose sharply higher. Going forward, DB forecasts WTI to fluctuate around fifty dollars in 2017, while the potential upside in oil prices is more limited as supply eventually increases. The loonie is particularly vulnerable to lower oil prices where positioning is extreme, especially when combined with an equity correction given Canada's balance sheet.”

“Policy differentials and politics should increasingly drive USD/CAD first lower and then sharply higher. Next week could see the market start to price in a rate hike as Poloz turns more hawkish given that the economy performs well and continues to surprise positively. This should drive USD/CAD lower leaving levels to buy in potentially around 1.28. However, measures to cool down the housing market should have increasingly negative effects on CPI while the odds of a foreign tax in the ebullient Toronto market should increase.”

“The elephant in the room though is the promised tax on exports to the United States, when Canadian productivity is still so low. It should already dampen investments and reduce potential growth. Faced with this, the Bank of Canada may threaten to tighten but is unlikely to be in a hurry. Canadian authority may prefer to put more pressure on the housing market keeping CPI below target. This and our existing dollar view should help USD/CAD overshoot to our 1.40 Blueprint target, starting at levels potentially around 1.28.”

“The risks are that our dollar view does not pan out, Canadian CPI fails to fade lower and a US/China trade war.”