What’s a trade that no one is expecting?
When the World Cup draw was announced and Costa Rica was slotted in with Uruguay, England and Italy and was a more than 10-to-1 underdog to advance beyond the group stage. They won 1-0 today despite being a 6-to-1 underdog.
Which is the biggest underdog in the currency market this year? It has to be the Canadian dollar, it’s the worst performer year-to-date among the majors. But, like Costa Rica, there is suddenly reason for optimism.
USD/CAD broke to the lowest since early January today and I expect the hedgers will promptly be racing into loonies.
The fundamental picture is where the good news story bears fruit. Last month’s jump in the consumer price index was dismissed by the Bank of Canada as a product of one-time skews but today’s 2.3% y/y CPI reading compared to 2.0% expected will make them think again. Couple that with a strong retail sales report and optimism from exporters in a report yesterday and the tide could quickly turn.
When Poloz first appeared at the Bank of Canada he was optimistic about the economy so don’t be surprised to see that attitude re-appear. At the moment no BOC rate hikes are priced in for the next 12 months but that could change very quickly if Poloz begins to strike a hawkish tone.
Against long odds could the loonie turn around and be the best currency trade this year? Stranger things have happened.
Every Canadian dollar chart looks beautiful at the moment but CAD/JPY looks the best. It broke the April high and the 200-day moving average today.
CADJPY daily
