Canadian CPI puts dent in Fed-BoC divergence trade
Nov 19 (Reuters) -A firmer set of inflation figures out of Canada has dented Fed-Bank of Canada policy divergence trade, which spells bad news for well-owned CAD short positions.
With both the headline and closely watched core rates surprising on the topside of projections, markets have now pulled back expectations for a 50bps cut at the BoC's December meeting, attaching roughly a 25% chance of such action, down from 40% pre-CPI.
For USD/CAD, the pair has slipped through 1.40 though they have since stalled at the first layer of support of 1.3980 (2022 high). A clean break of this level could exacerbate downside momentum amid the overhang of CAD shorts, opening the door for a test of additional support at 1.3930-45 (20DMA/Aug high).
However, those looking for a CAD rebound would likely be disappointed should we see a move back above the pre-CPI breakdown level (1.4026), which would likely reject the view that we could see a larger pullback in the pair.
That said, as we head towards a seasonally bearish period for the dollar, in light of the latest inflation figures, the Loonie may be among the currencies better placed to gain against the greenback.
For more click on FXBUZ
USD/CAD vs spreads https://tmsnrt.rs/4fysY4K
USDCAD chart https://tmsnrt.rs/3B0dnf3
(Justin McQueen is a Reuters market analyst. The views expressed are his own.)
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