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Flash: Shift turns from Fed to BoC - BMO Capital Markets

FXstreet.com (Barcelona) - Greg Anderson, FX strategist at BMO Capital Markets notes that the focus of FX markets over the past two weeks has been almost exclusively on the USD.

He begins by noting that most of the market’s attention has been centered on the issue of whether the Fed might begin to reduce its pace of QE as early as this summer (decisions are June 19 and July 31). Further, he notes that FOMC speeches of the past week have left that issue thoroughly explored but completely unresolved and at this point, markets are ready to move along to a different theme, although US data will be immediately tied back to the taper-timing theme and traded upon if it deviates sharply from expectations.

Anderson sees that the week ahead will be holiday shortened for many participants with Monday being a market holiday in both the UK and the US and the most important data points are the May consumer confidence reading due out on Tuesday, the 2nd print of Q1 GDP due out on Thursday and then the core PCE deflator for April to be released on Friday. Of those three items, the PCE deflator may gain the most market attention. With March’s PCE coming in at just +1.0% YoY overall and 1.1% YoY core, a further deceleration to levels below 1.0% would probably be the most market-moving surprise as it would presumably push out the market’s expected Fed taper date and potentially trigger a run on the FX market’s net long-USD position.

However, alongside that issue, he notes that markets searching for new themes to trade are likely to go to the week’s only central bank decision for direction. He feels that decision is the BoC’s policy announcement slated for 10:00 AM on Wednesday May 29. Further, there is absolutely no expectation or chance of a rate move by the BoC, but there is a chance that the Bank will back away from or reformulate its soft indication of a tightening bias. That bias has been in place for over a year. When launched, it was a careful compromise between two concerns: an overheated property market and a Canadian dollar threatening to revisit its 2007 highs. Both concerns are less relevant now, so it is possible that outgoing BoC Governor Carney could drop the bias as his parting gift to new BoC Governor Stephen Poloz, who takes over on June 3rd.

Anderson feels that if the bias were to be dropped, USDCAD could make a run at and potentially breach the 1.0500 level for the first time since 2011. He writes, “Our economists consider a dropping of the bias as unlikely at this meeting, though. The other element of the press bulletin that is unlikely to change is the longstanding reference to the challenge of “the persistent strength of the Canadian dollar.” However, if it were to be dropped, the result would probably be quick drop in USDCAD of a big figure or more.”

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