DB USD/CAD Update; EUR/NOK & Norges Bank

[RTFX-Trading]

FX Daily: London

USD/CAD Update; EUR/NOK & Norges Bank

Today's Key Data and Events
EUR M3 money supply for April, 10.8% yoy expected (08:00 GMT)
NOK Norges Bank announces rates, 25bp rate hike expected (12:00 GMT)
USD ADP Employment report for May, 45k expected (12:15 GMT)
CAD Balance of Payments for Q1, $C8.5bn expected (12:30 GMT)
USD FOMC Minutes from 9 May meeting (18:00 GMT)

Upcoming Event Risks
June 1: US Non-farm payrolls
June 6: ECB rate decision, RBA rate decision
June 7: Bank of England rate decision
June 14: SNB rate decision

Very hawkish BoC sets stage for July Yesterday's statement from the BoC has clearly put markets on notice to expect a rate hike in July, with the BoC stating that: " there is an increased risk that future inflation will persist above the 2 per cent inflation target and that some increase in the target for the overnight rate may be required in the near term to bring inflation back to the target."

While we had thought that the recent move lower in USD/CAD had made it looked stretched on some valuation measures (namely against energy and non-energy commodity prices), the sell-off in the BAX strip on the back of the BoC's statement (the Dec-07 BAX contract selling off some 15 bps) drove a sharp move lower in USD/CAD. With the central bank now seemingly highly likely to hike in July, and our Canadian economist expecting another rate hike after that (most likely in September), the momentum in USD/CAD will, in our view, remain to the downside.

Norges Bank expected to hike, will oil provide additional support over coming months? Central bank events continue to dominate the calendar over the day ahead, with the release of the minutes from the FOMC's 9 May meeting and also a rates announcement from Norges Bank.

As the first chart below shows, recent Norges bank meetings have tended to produce two types of outcomes for EUR/NOK. Namely, Norges Bank disappoints and EUR/NOK rises modestly; or alternatively a hawkish stance from the central bank sees EUR/NOK sharply lower. Both markets and analysts are looking for a rate hike from the Norwegian central bank today, with the accompanying statement therefore likely to be the key point of interest.

While we have been looking for a move lower in EUR/NOK for a while, the fully priced Norwegian rates market and also some recent softness in oil prices (the second chart on the right highlights the tight relationship between oil and EUR/NOK) suggests that a decisive break to the downside out of recent ranges may take a little time. However, oil prices have in recent years tended to rise from the second half of June and through July as both the driving and hurricane seasons get fully underway. Should the same seasonal pattern be evident this year, it should be supportive of a lower EUR/NOK; and also make some of the non interest rate USD/CAD valuations look less stretched.