The Canadian dollar was the top performing G10 currency yesterday with the policy announcement and communication update ultimately helping to lift the currency. The 25bp cut was well telegraphed and fully priced so the 10bp intra-day jump in the 2yr swap rate was more down to the communications having a hawkish element.
The guidance element of the statement – the last paragraph basically was what fuelled some paring of rate cut expectations. The BoC stated that “monetary policy cannot offset the impacts of a trade war” but then added “what it can and must do is ensure that higher prices do not lead to ongoing inflation”. The BoC would be “careful” in assessing the balance between downside risks to inflation from a weaker economy and upside risks stemming from rising costs.
This more nuanced interpretation is more reasonable from the standpoint of the BoC given how far along they are in easing the monetary stance. There is no need to appear in a panic given the potential level of the neutral rate is in sight. The cut yesterday was the seventh consecutive cut with a cumulative total easing of 225bps. Governor Macklem also confirmed that a discussion on cutting by 50bps did not take place. Prior to the cut today the OIS market was implying 13bps of cuts were priced for the April meeting, assuming a 25bp cut took place today. That pricing has shrunk slightly to 11bps while the end-year cumulative total of easing dropped by 6bps.
That’s not a particularly big adjustment and while CAD was the top G10 performer it advanced by a mere 0.4% versus USD. As we highlighted here yesterday, the Leveraged Funds’ positioning currently shows close to a record short CAD position in data going back to 2006 – so the market is certainly vulnerable to a squeeze although that positioning is a better explanation perhaps of the limited CAD depreciation from current levels given the scale of negative uncertainties.
In reality, tariff risks are untradeable. President Trump has already postponed twice the introduction of a 25% tariff on all imports from Canada and Mexico while how reciprocal tariffs would look is very unclear. In reality, if Trump proceeds with a 25% tariff a lot of those tariffs would be reversed under a true reciprocal tariff regime. But given the numerous factors Trump is using to set a reciprocal tariff, it is impossible to know what the end-game status would be. With Canada playing hard-ball with Trump (further retaliatory tariffs were announced yesterday – CAD 30bn of tariffs on US steel/aluminium-related goods imports to Canada) there are higher risks of more aggressive action. If action is taken by the US on 2nd April and that action holds, USD/CAD will trade higher toward levels closer to 1.5000 but investors may be reluctant to trade the macro impact until we start to see the actual impact anecdotally or in the official data.
