SocGen Comments on Canadian Dollar, Other Currencies

A common theme among foreign exchange strategists is that has recently been undershooting levels normally suggested by short-term rate differentials, said ING.

The common theme among them is that most are saying rate differentials should justify closer to 1.05, wrote the bank in a note.

Wednesday provided a great opportunity for to rally, stated ING. Two-year rate spreads narrowed by 5bps on the 0.2% reading on core United States consumer price index. Yet struggled to hold the rally to 1.0350.

Not very impressive and perhaps represents a conviction view that the eurozone and the euro will underperform this year on weak growth and weak leadership in the region, pointed out the bank.

ING also notes that current speculative short positioning seems much more extreme in currencies like the Canadian (CAD), Australian (AUD) and New Zealand (NZD) dollars than it does in the euro. This suggests that , and could all come lower if U.S. President-elect Donald Trump doesn't deliver as aggressive a tariff package as some expect next week.

The strong US dollar setting could push back to 1.0225/50 on Thursday. However, the bank suspects that some buying may emerge there as investors lighten positions ahead of Monday's event risk.

Central and Eastern European markets saw "significant" relief after U.S. inflation numbers on Wednesday, resulting in a strong rally in the rates and bond markets, added ING. The foreign exchange market was more muted but still touched 410 for a while, the lowest level this year.

Implications for the days ahead are more mixed though. The bank saw a further tightening of rate differentials in Poland and the Czech Republic, implying weaker foreign exchange.

While closed some of the gaps in the previous days, continues to diverge. For , ING keeps an upward bias, following the direction of the rates market. Poland is more complicated and dependent on Friday's tone from the central bank (NBP) governor.

If the tone remains hawkish like in December, the zloty (PLN) should stay supported, and the gap between rates and foreign exchange will close due to a sell-off in the rates market rather than the reverse, according to ING. However, the NBP has been unpredictable in recent months and could surprise.