23 Jan 2014
Flash: BoC leaning on a weaker CAD - BMO
FXstreet.com (Guatemala) - Stephen Gallo, European Head of Currency Strategy at BMO Capital said, "All things being equal, we really don’t think the BoC’s ‘dovishness’ yesterday was flagrant enough to justify another sharp move lower in the CAD over the immediate post-BoC time period. However, all things are not always ‘equal’, and this is just what we’ve experienced."
Further Key Quotes:
"We see two dominant forces at work in USDCAD at the moment, which have aggravated the recent move. First, the naysayers used the ‘coded’ wording and some of the explicit references to the CAD in yesterday’s statement and MPR to get back into the short CAD positions they covered pre-BoC. These are the participants who probably didn’t expect the BoC to ‘turn up the dial’ yesterday at all."
"If it is actually leaning on a weaker CAD somewhat, the BoC had this factor on its side yesterday. Historically, the Bank does not have a reputation for being aggressive, so even the modest turn in the dial was enough to drag new CAD shorts back into the game."
"Second, the presence of layered option barriers between 1.100 and 1.115 has forced writers of structures with USD/CAD pay-outs on the topside to buy in the spot market. However, this also factors into the behavioural properties cited in the first factor above. Those short of gamma probably didn’t expect the BoC to be aggressive either, and nor did they expect the CAD devaluation to proceed this quickly. So they’ve panicked a bit too."
Further Key Quotes:
"We see two dominant forces at work in USDCAD at the moment, which have aggravated the recent move. First, the naysayers used the ‘coded’ wording and some of the explicit references to the CAD in yesterday’s statement and MPR to get back into the short CAD positions they covered pre-BoC. These are the participants who probably didn’t expect the BoC to ‘turn up the dial’ yesterday at all."
"If it is actually leaning on a weaker CAD somewhat, the BoC had this factor on its side yesterday. Historically, the Bank does not have a reputation for being aggressive, so even the modest turn in the dial was enough to drag new CAD shorts back into the game."
"Second, the presence of layered option barriers between 1.100 and 1.115 has forced writers of structures with USD/CAD pay-outs on the topside to buy in the spot market. However, this also factors into the behavioural properties cited in the first factor above. Those short of gamma probably didn’t expect the BoC to be aggressive either, and nor did they expect the CAD devaluation to proceed this quickly. So they’ve panicked a bit too."