MUFG suggests that the Bank of Canada (BoC) may not be in a hurry to increase rates, especially after the recent disappointing Q2 GDP report. However, they also note that the Canadian dollar (CAD) is trading at undervalued levels, suggesting that much of the bad news is already priced in.
Key Points:
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GDP Contraction: The Canadian economy unexpectedly contracted by 0.2% in Q2, following a downward revision of Q1 expansion to 2.6%. This marks the second contraction in the last three quarters.
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Less Pressure on BoC: Given that growth is running below the BoC’s estimated potential output range of 1.4% to 3.2%, the urgency to raise interest rates has likely lessened.
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CAD Undervalued: MUFG’s short-term fair-value model suggests that the Canadian dollar is already trading at undervalued levels, implying that the market has already priced in much of the negative news.
Implications:
For Traders:
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Short-Term Opportunities: Traders may see an opportunity to go long on CAD, anticipating a rebound if the undervaluation is corrected.
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Risk Management: It would be prudent for traders to consider downside risks given the economic contraction and the cautious stance of the BoC.
For Policymakers:
- Rate Decisions: Policymakers at the BoC will likely be cautious in their approach to further rate hikes, especially considering the weaker-than-expected GDP data.
Conclusion:
While the Canadian economy is showing signs of slowing down, reducing the pressure on the BoC to hike rates, MUFG’s short-term valuation model indicates that the CAD is undervalued. This suggests that the market may have already factored in much of the negative news, potentially creating trading opportunities for those looking to capitalize on a correction.
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This article was written by Adam Button at www.forexlive.com. Source