The short term correlation of one month IV and spot that we pointed out last week as a leading indicator of a potential USDCAD bottom has reversed this week suggesting more sustained C$ strength. The BoC decision to raise rates again was unexpected as it took place without any press conference. The BoC has now removed the 50bp cut they implemented in 2015 following the oil price collapse. If the Canadian economy really is on course to grow in excess of 3% or more further rate hikes are on the cards. However, that is, at this point a bit of a reach. In order for that to happen, we would have to have a global growth outlook that is accelerating & further improvements in the commodity complex. No doubt, we have seen a sustained commodity price correction, however, it is still too early to support the view that we are in a long term commodity price expansion. Copper made a new high at 3.15 but on Friday came off sharply to close just over 3.03. WTI has also failed to break over the key 50$ level. The DJ Commodity index has proven more resilient and ended the week only slightly below the key 590 level. Finally, short term 2 YR CAD-USD yield differentials are now positive and in this environment, the C$ downside is going to be far more limited. Equities generally rally in the early stages of a tightening cycle. So far, the TSX reaction has been muted at best. If rates rise further in Canada, particularly in the context of the Federal Reserve staying on hold, that could prove to be a policy mistake if the "synchronized global growth" story is not nearly as resilient as the BoC believes.
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