USDCAD looks cheap relative to the level implied from oil – TDS

Mark McCormick, North American Head of FX Strategy at TDS, notes that after bottoming out in April, USDCAD has traded in a relatively tight range.

Key Quotes

“Short-dated (3m) implied vol is trading at multi-month lows while 3m risk reversals sit near longerrun averages. Rates and oil moves have captured its attention recently, driving most of the move. USDCAD look cheap relative to the level implied from oil, suggesting scope for it to play catch-up with the oil move. In turn, the recent dip probably lends a decent level to reengage USDCAD with topside resistance near 1.3315.

The recent string of softer US data has seen the 2y interest rate differential move against the greenback. The Fed and BoC have both helped in this regard. Last week the Fed offered little guidance about September while the BoC maintains its optimism in the face of waning economic momentum. The spread peaked in mid-July, falling nearly 7bp since, but is still 12bp in the US's favor. This is the lower end of the range with the average spread between the US and Canadian 2y rate around 25bp over the past year.

We see asymmetric risks for the US-CA 2y spread this week with markets expecting a solid NFP but only pricing in a 52% chance of one 25bp rate hike over the next year. At 15k the standard deviation of NFP forecasts is quite small against history so markets could get caught off guard. A simple regression shows a 10bp shift in the 2y spread is worth about 2.5 cents in the currency so Fed repricing could support upside momentum. The importance of oil is rising while oil prices slide.

Outside the daily drivers, recent housing developments were also noteworthy. The government of the Province of British Columbia recently announced that it plans to impose a 15% tax on foreign buying real estate in Vancouver. The BC Finance Ministry noted that foreign flows totaled close to C$1bln in the month of June. This excludes flows to other cities, like Toronto, but estimates suggest foreigner buyers accounted for about 5% of transactions in their study. Across the country, this suggests total monthly inflows are certainly larger than the Vancouver estimates and my total close to C$2bln. Equity inflows averaged C$1.5bln over the past year so slowing housing flows could negatively impact CAD over the longer-run.”