3 Feb 2015
Take profits on long USD/CAD positions – Nomura
FXStreet (Barcelona) - Research Analysts at Nomura, note that the most-important catalysts for USD/CAD upside have materialised and the currency is no longer overvalued, and thus suggest to square off long positions for the pair.
Key Quotes
“Market expectations for the Bank of Canada have caught up and are now pricing in slightly more than another rate cut by the end of the year. The December rate future currently implies anther 30bp of easing during 2015 (on top of the 25bp already delivered).”
“While another rate cut is very possible in March, we are not confident that a scenario of more than one additional cut is the central case. Hence, rate pricing is starting to look more stretched.“
“Second, USD/CAD had also adjusted to its model-implied fair value. Our valuation models, based on commodity prices and rates differential, currently put the fair value of USD/CAD at about 1.26. Hence, there is no longer any obvious valuation gap to correct (unless you assume that oil prices will fall substantially further).”
“We would not rule out that upside momentum in USD/CAD continues in line with global USD momentum, especially if the BoC cuts rates again in March (CAD short positions continue to be less extreme than for other G10 currency, for example).”
“Nevertheless, we think the most important Canada-specific catalysts for USD/CAD upside have already materialized.”
“We think it is prudent to book gains, while maintaining long USD exposure from a portfolio perspective on a more diversified basis.”
Key Quotes
“Market expectations for the Bank of Canada have caught up and are now pricing in slightly more than another rate cut by the end of the year. The December rate future currently implies anther 30bp of easing during 2015 (on top of the 25bp already delivered).”
“While another rate cut is very possible in March, we are not confident that a scenario of more than one additional cut is the central case. Hence, rate pricing is starting to look more stretched.“
“Second, USD/CAD had also adjusted to its model-implied fair value. Our valuation models, based on commodity prices and rates differential, currently put the fair value of USD/CAD at about 1.26. Hence, there is no longer any obvious valuation gap to correct (unless you assume that oil prices will fall substantially further).”
“We would not rule out that upside momentum in USD/CAD continues in line with global USD momentum, especially if the BoC cuts rates again in March (CAD short positions continue to be less extreme than for other G10 currency, for example).”
“Nevertheless, we think the most important Canada-specific catalysts for USD/CAD upside have already materialized.”
“We think it is prudent to book gains, while maintaining long USD exposure from a portfolio perspective on a more diversified basis.”