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GS: Play Further Hike Call With Short EUR/CAD Rather Than FI

CANADA
  • Goldman Sachs still see the argument for a final hike from the BoC as being strong “given our expectation that inflationary pressures will persist (particularly through shelter), alongside some pickup in activity through the rest of the year”.
  • This was supported by “Friday’s labor market data—particularly the increase in hours worked and wage growth acceleration” which raised the odds the bank will hike again to a terminal 5.25% rate.
  • The market currently prices only about a 1-in-4 chance of a 25bp hike in Oct, and a roughly even chance for a hike by Dec. “These odds should be higher, but with a roughly symmetric downside, neither Dec BOC OIS nor BAZ3 shorts appear especially compelling.”
  • However, in FX space, “CAD has room to strengthen on crosses alongside the robust US growth outlook. We have recommended short EUR/CAD as our preferred expression for CAD strength, meanwhile EUR looks likely to remain under pressure from the weak regional growth outlook.”
  • US equities have also been weakening, which typically benefits EUR/CAD, but US equities are “now close to our year-end target of 4500. While further downside in equities is possible over the near-term, if they remain flat around these levels while real rates move higher, CAD should still benefit versus EUR.”
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