CAD: Rally is extending today - BBH

The Canadian dollar is extending yesterday's rally and is up about 0.5% today after gaining about 1% yesterday as the trigger was comments by the Senior Deputy Governor Wilkins whose economic optimism spurred a reassessment of the prospects for a rate hike, explain the analysts at BBH.  

Key Quotes

“She cited the broadening recovery and improving labor market as considerations when deciding how much accommodation the economy requires.  The Bank of Canada next meets on July 12.  That seems too soon to expect a hike, but the market is on notice that the next move will likely be a hike.”

“In effect, Wilkins signaled a shift in the neutral stance of the central bank, or that is the way the market understood it.  Interpolating from the OIS, the market had discounted about a one-in-five chance of a hike before the end of the year as of June 1.  After June 9’s strong employment report, the odds increased to one-in-four.  After Wilkin's comments, a 40% chance is discounted.”

“Speculators appear to have been caught wrong-footed.  Speculators in the CME futures had amassed a record net and gross short Canadian dollar position in late May.  It has only begun to be pared as of a week ago.  The record net short position reached at the end of May was 99.1k contracts.  It stood at 94.5k contracts as of June 6, the most recent data point.  The gross short position reached 137k contracts in the middle of May.  It stood at 121k a week ago.  As the shorts get squeezed, there is scope for the US dollar to fall toward CAD1.30-CAD1.31.”