Gary Cohn out. Bank of Canada on deck. USDCAD steady to higher.

CXI March 7th, 2018

Summary

USDCAD: Dollar/CAD traders didn’t do much after the market bounced off the 1.2860-70 support area yesterday. It was very much a consolidation of the North Korean headlines for the remainder of the NY session as the broader USD consolidated as well. Resistance in the 1.2920s was tested once but failed and we closed near the lows, albeit not below the 1.2860-70 support area. Then markets got a bit of a tape-bomb with the announcement of Gary Cohn’s resignation. This occurred right after the NY close when most markets were shut and when FX liquidity was poor. The USD up-ticked pretty much across the board, the S&Ps and USDJPY gapped lower and the biggest beneficiaries were USDCAD and USDMXN as Cohn’s exit, in our opinion, tells markets that Trump is not afraid of a trade war (even if he has to lose his senior economic advisor and the support of Wall Street that wanted Cohn in the White House). The move vaulted USDCAD above the 1.2920s in early Asian trade, and that level is now holding as support. The move back above the 1.2920s also invites a test of resistance, which is now 1.2960-1.2985. However, traders will likely stand pat for now as the Bank of Canada interest rate decision is up next at 10amET (no press conference to follow this time around). Markets are not expecting any changes to Canadian monetary policy today, and our sentiments are the same. We think the BOC will give the markets a balance tone (like last time) but given the horrible January employment report, weaker than expected final GDP numbers for 2017, concerns about NAFTA and the housing sector (and now steel tariffs), we think there is a risk the central bank’s tone becomes cautious, which will likely kill any further talk of rate hikes for this year. Should that happen, we could see USDCAD very easily resume its rally higher. One other thing we’re paying close attention to at this hour is a large USDCAD option expiry at 1.3000 for Friday’s NY cut ($1.2bln). This will follow the Canadian and US employment reports out on Friday morning, but may act as a magnet for the market should USDCAD hold chart support today. On the US data front today, we get the February ADP employment report at 8:15amET (markets expecting +200k), the US Trade Balance for January at 8:30amET (markets expecting -$55bln), and the Fed’s Beige Book at 2pmET.

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