Morgan Stanley on what's next for the Canadian dollar
Morgan Stanley FX:
Canada represents another example of a region where the recent reliance on the commodity related sectors has made the currency vulnerable in times of a downturn due to the limited cushion from non commodity related industries.
We believe that the BoC underplayed that risk yesterday and interpreted the statement to be less hawkish than the market did, so we suggest fading the subsequent CAD strength.
We mentioned yesterday that the market should not have been expecting a major change in tone given the meeting was in between MPRs and we think there were some notable dovish changes to the statement:
First, the BoC said the structural adjustment is "proving to be uneven," removing any reference to strengthening exports and acknowledging the poor capex survey pointing to declining business investment in 2016. It projects the wildfires to reduce 2Q GDP by 1.25% which, without accounting for the other recent weak data, would push the Bank's 2Q forecast into contractionary territory (-0.25%). Importantly, the Bank's addition of the word "still" when describing their current stance of monetary policy,an unnecessary inclusion, seems to imply an openness to changing stance in the upcoming meetings should the economy disappoint. There were some hawkish changes, such as the characterization of household vulnerabilities as having "moved higher," but we don't think they are material.
We retain our bearish CAD view and are watching next week's March GDP and April trade data closely.
MS maintains a long USD/CAD from around 1.3095 (Entered last Thursday 5/19 at NY Close). Spot at 1.2984.
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