Archived IMT (2011.04.12)

30% Prob of BoC Rate Hike. Euro Pulls Back for 2nd Day. Would SPain beb Next ?

BANK OF CANADA RATE DECISION marks the key economic event of the early New York session. Last time, the BoC upgraded its assessment of domestic economy from "recovery proceeding broadly as anticipated" to "proceeding slightly faster than anticipated." Canadian central bank was more upbeat on consumption and business investment, but also attributed headwinds in the export sector to the strength of CAD. Even though the prior Conservative ruling party appears to have regained control headed into the national elections, political turmoil and budget uncertainty are likely to keep BOC at 1.00%. DESPITE A HEFTY 30% CHANCE OF A 25b-HIKE priced in the OIS market, a rate hike would indeed be surprising at this juncture. If Canadian central bank is truly concerned about the strength of CAD relative to USD, it would be wise to wait on the late-April FOMC decision to get some more clarity on the future of QE2 - recall that there is no Fed meeting in May. BOC last assessment on inflation was also rather lukewarm, suggesting expectations moved up but remain concentrated within the target control range. USDCAD spike topped out at the 4-week trendline resistance of 09620s. In the event that risk aversion deepens alongside the an unchanged decision may likely lift towards 09690s. In the unlikely event of rate hike, USDCAD seen at 0.9490s, but we could see broader CAD strength vs EUR & AUD.

EURUSD IS BACK BELOW $1.44 with what's shaping up to be a second losing session in a row. A quick glance at the daily chart reveals that over the last 5 occasions, consecutive sessions of EUR losses were followed by further weakness. If renewed risk aversion in the wake of a disappointing Alcoa result takes hold in the US session - and equity futures certainly point to more than just a modest selloff - safe-haven greenback demand may well result in further Euro losses. Today’s op/ed in the Financial Times by Wolfgang Munchau warning that an ECB rate projected to reach 2% by the end of this year would have a severe impact on the feeble Spanish housing. Munchau argues that while price per sq/m rose over 100% in the decade leading to 2007 crisis, by the end of 2010 it fell only 18%. Higher interest rates in a sector already tied primarily to the 1-year Euribor rate would only exacerbate the "stress already in the system - unemployment, higher oil prices, and rising interest rates." With ECB tightening in the rear view mirror and only a vague indication over the timing of the next policy move, Mar 22nd high/Apr 7th low around $1.4240 - also an area of trendline support for a 2-month channel - may well become a pull-back target.

By GG - AshrafLaidi.com