USD/CAD falls to the lowest since February on monetary policy divergence
Everyone is cutting but the Bank of Canada
The Bank of Canada suddenly finds itself in a lonely spot. The Fed, ECB, RBA and RBNZ have cut or shifted to an explicitly dovish stance.
Canada, meanwhile, has been benefiting from upbeat economic data and the Bank of Canada believes a soft patch in Q4 and Q1 is over.
That divergence, along with today's rally in oil prices, has given the loonie its biggest two-day lift since early January.
The pair has cut through the June low and is now threatening the late-February low of 1.3113.
The risk is that the Bank of Canada decides that it can't fly solo. The market is betting that's exactly what will happen eventually. The 10-year government of Canada yield is at 1.43% and the 2-year is at 1.38% compared to the overnight rate at 1.75%.
However the probability is a near-term cut is low. The OIS market pegs the chance of a cut at the July meeting at just 6%, that rises to 27% in Sept and 48% in December. Meanwhile two Fed cuts are fully priced in by year end.
The question is really: How long can Canada fly solo? It might be longer than you think. The dovishness elsewhere is lifting commodity prices and the BOC won't want to lower rates an refuel the Canadian housing bubble. That could all change if the US looks like it's headed towards a recession or the trade war really picks up, but for now they might be happy on the sidelines.
In terms of trading, however, watch out for a shift to a more-cautious stance. The BOC could indicate that it's ready to cut rates if the situation deteriorates but it would have strong conditionality. A headline like that could unwind the recent rally in CAD. However it could be a long wait with no BOC comments scheduled before the July 10 decision.