Oh Canada, What Next ?

The Bank of Canada meets today. While there will not be change in rates, the Bank of Canada governor has already signaled a more neutral stance. The previously indicated desire to remove some monetary accommodation (raise rates) will be pushed back in the face of a weaker global outlook. 

Note that tomorrow’s monetary policy statement will further drive home the message that the monetary stance is now neutral.  This will likely be reflected in new and more somber economic forecasts, including a recognition that its preferred inflation measure shows less price pressures than previously anticipated.   

Investors appear to have largely taken this on board, but this does not mean that there will be no market reaction. Rather, if there are no surprises, the Canadian dollar looks poised to continue to retrace the June-mid-Sept 7.8% advance against the US dollar. It is flirting with the 38.2% retracement near CAD0.9945. The next retracement objective is near CAD1.0040.  

We note that the Commitment of Traders as of Oct 16 showed that the trend following and momentum market segment was still heavily long Canadian dollars in the futures market.  The gross long position was 106k contracts.  This is off the mid-Sept record of 127k , but consider that as recently as early August the gross long position was less than 40k contracts. 

Yesterday we noted that the Canadian dollar's correlation (60-day percentage change) with the S&P 500 had softened considerably since the summer and now is near the lowest level since April 2011.  to this we add that the correlation between oil (WTI) and the Canadian dollar has also fallen off from 0.80 in the July through early-September to just above 0.50 currently, the lower end of where it has been since Q1. 

Canada's decision to block Malaysian-state owned Petronas from buying Progress Energy Resources does not sit well with many investors.  Fitch may have spoken for many when it called it "resource nationalism".   Also expressing what many are asking, Fitch suggests that Canada's decision "increases the likelihood that the Canadian government will also reject CNOOC's bid" to acquire Nexen. 
Oh Canada, What Next ? Oh Canada, What Next ?  Reviewed by Marc Chandler on October 23, 2012 Rating: 5
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