CAD, RBNZ and Signs

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BoC pricing is starting to make a bit more sense but it could keep going.

by Brent Donnelly

February 23, 2024

Current Views

Long USDJPY @ 149.10

Stop loss was 148.14 now 149.14

Take profit 151.15/25

February 23, 2024

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Hikes and no-hikes

Stocks remain in the spotlight while yields grind higher and FX zig zags. The two main side narratives right now are Canada, where yields have come off the boil significantly following the weak CPI print, and New Zealand, where the RBNZ meets next week.

The pricing in CAD rates has been hard to understand as the market has been pricing fewer cuts in Canada vs. the US despite a much weaker economy, significantly more slack, way higher consumer debt, and horrendous GDP growth despite rapidly rising population. The pricing is coming back into line, but still looks off to me. While the Fed and BoC tend to move in tandem, generally, their policy moves don’t happen in lockstep. The BoC could easily cut before the Fed. As such, the differential in Fed vs. BoC, which has dropped from +1.8 to near zero, could easily go to -1.

This move in BoC expectations has also moved 5-year rate differentials. While the rate diffs were useless as the year end USD selling crushed USDCAD, they should matter again at some point.

And we get RBNZ next week. I am still in the no hike camp, along with the majority. TD and ANZ are calling for a hike, and the market is priced for around 28% chance of a hike. Orr’s commentary last week showed no sign of urgency on inflation, inflation expectations are coming down, the economy is not particularly strong, and housing is stable at lower levels. Given the late cycle hikes in 2007 were a mistake, I don’t see why Orr would hike now as there is no emergency and interest rates are already restrictive.

Here’s the calendar for next week. Core PCE is one highlight, along with the RBNZ, US corporate month end, German CPI and China PMIs.

Final Thoughts

Walgreens stock went down yesterday, despite a gigantic jump in the broad market. This is consistent with the persistent weakness that should be expected in the stock from now until mid-March. Amazon was strong, up 3.5% vs. NASDAQ up 3.0%. Again, this is the pattern from prior add/deletes for the DJIA. The time to sell AMZN, according to past performance, is at the close Monday. The real RV trade is short WAB now, short AMZN at the close on Monday, and buy equal weight S&P at the close Monday to hedge the two shorts.

Short CAD vs. your favorite currency is making more and more sense and I might add that as an official idea early next week. Can scale in here to 1.3430.

Have a funny weekend.