This post is taken from our March 13th weekly report.

In our February Monthly we suggested selling CAD, and buying Bankers’ Acceptances (BAs), the Canadian analogue of Eurodollar futures. With ~64bps of rate rises priced in from the Bank of Canada over the next year, we saw scope for some of these potential rises to be priced out, and the CAD to sell off, given the slowdown we saw in our leading indicators for Canada.

Since the release of that publication four weeks ago, the US dollar has rallied against the CAD (top-left chart) due to NAFTA uncertainty. USDCAD is not at an attractive entry point today (although the CAD may still have some more to weaken), but last week’s sell off in BAs offers an opportunity to add to or enter positions.

The Bank of Canada may soon find it is hiking into a slowing economy and thus turn more dovish. Our leading indicators for growth and core CPI in Canada (bottom charts) have both moved lower in the last month. The employment report may have been strong, but employment is a lagging indicator, and only tells us where the economy has been, not where it is going.

(Click on image to enlarge.)

Charts demonstrating Bank of Canada rates

Source: Bloomberg, Macrobond and Variant Perception