DB FX Daily: Canadian CPI Changes the BoC Outlook

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FX Daily: Canadian CPI Changes the BoC Outlook

Canadian CPI Changes the BoC Outlook

We wrote yesterday that in the absence then of an upside surprise from either yesterday's inflation report or today's retail trade report a move in USD/CAD towards 1.12 was a risk. The CPI data come in above expectations, however, and as a result our Canadian economist is now looking for a rate hike by the Bank of Canada in Q3 (with some probability of a move as soon as the next interest rate announcement on 29 May). While the headwinds for CAD we discussed yesterday remain (gap with rate support on the chart below, loss of momentum in the commodity rally, and positioning) the stronger rate support likely offsets this to some extent. So with the medium-term backdrop for CAD now even more favourable, our previous view that a move to the 1.12 level would provide an attractive selling opportunity may be a little ambitious. Instead, we would now look to sell a move in USD/CAD towards 1.1050. In the more medium term, the prospect of a BoC rate hike suggests that if USD/CAD moves beyond the lows of last year (around 1.0930), a move towards 1.05 could be a potential target.

Looking for a Dip to Buy in AUD/USD

The price action in metals markets has continued to deteriorate this week, with the LMEX base metals index falling back to levels last seen in early April. This has weighed on AUD/USD, as has a moderation in rate support following the softer-than-expected wages data on Wednesday. The chart below indicates further weakness in AUD/USD is likely in the near term. The near-term risks therefore appear skewed towards a further decline to 0.8120 (the first Fibonacci retracement level of the rally from early March), a move that would help close up the gap that has appeared in the chart. We continue to see the medium-term fundamentals behind AUD/USD as strong, however. Global growth remains resilient to sub-par US growth, while the recent US inventory data supported the better manufacturing surveys in the US recently, suggesting a better backdrop for commodity prices. While AUD's rate support moderated recently, rate differentials with the US remain at levels that have historically been consistent with AUD/USD strength. Given these medium-term supports we are not inclined to chase the AUD/USD move lower, but would prefer to use a move towards the 0.8120 retracement level as a buying opportunity.