Global risk sentiment recovered yesterday after a few tough sessions for global equities. The dollar tends to be seasonally weak in December, so this is a month of damage limitation for dollar bulls. We continue to think that CAD has a better chance of outperforming next year thanks to limited exposure to China and Europe’s economic woes while being positively correlated to a rise in energy prices. Today’s US calendar includes PPI and University of Michigan survey numbers. With markets being focused on various gauges of inflation, expect dollar sensitivity to these data releases.
The USD/CAD settled a little below CAD1.3600 yesterday but has come back today and is near CAD1.3640 in the European morning. It looks poised to test the week's high near CAD1.3700. Initial support is seen around CAD1.3600. Assuming there is no significant reversal, this is fourth consecutive weekly loss for the Canadian dollar, the longest losing streak in April-May.
Markets are pricing in around 55bp of tightening ahead of the ECB meeting next week, and with no more speakers before the rate announcement and no key data releases except for the ZEW surveys on Tuesday, we doubt that rate expectations will move much in the coming days. We still think that EUR/USD will struggle to trade sustainably above 1.0600, and is mostly facing downside risks into year-end as the dollar could regain some ground on global risk uncertainty and rebounding energy prices.
The only release to highlight in the UK calendar today is the Bank of England’s inflation attitude survey. Still, markets appear to have cemented their expectations around a 50bp rate hike by the BoE next week, and this may not change drastically before the policy announcement. GBP/USD should hover around 1.22 today, but risks are tilted to the 1.21 area.
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