Is The USD Undervalued Against The CAD And Most Of Its Peers?
USD - US Dollar
The dollar has moderately benefited from aggressive market bets on multiple 50bp rate increases by the Fed, which have sent short-term US rates sharply higher. Looking at short-term valuation, the dollar is looking cheap against most G10 currencies following the recent moves in yields. The Fed’s openness to 50bp rate hikes has clearly freed up some significant space for dollar appreciation, and this space has been only marginally filled so far, so even if rate expectations don't have much further to run, FX should ultimately catch up with the move in rates and we continue to see the balance of risks for the dollar as skewed to the upside.
Today, markets are keeping an eye on any developments on the Russia-Ukraine peace talks, which have contributed to lifting sentiment at the start of this week. On the data side, we’ll get the first piece of jobs data today with JOLTS openings in the US, before ADP and official payrolls are released tomorrow and on Friday, respectively.
CAD - Canadian Dollar
The CAD has began the day well below 1.25, suggesting that it is consolidating its recent gains ahead of 1.2450. Comments from BoC Kozicki late last week made a strong case for the bank to pursue tighter policy; she noted that inflation was too high and above the bank’s own forecasts made in January while price pressures were broadening, and the labor market was tight. The words echoed the tone of prior BoC statements and, in some ways, offered little new; markets are now pricing in a 50bps hike next month. CAD support is maintained by rising commodity prices and increasing domestic interest rates, especially with broader market volatility restrained. Look for the CAD to remain generally well supported on minor declines against the USD in the near-term. Observe the USD/CAD trends.
EUR - Euro
The EUR/USD is looking a little overvalued after the pair failed to correct sharply on the back of significant widening in the EUR-USD rate differential. Current market estimates suggest that the fair value for the pair is in the 1.07/1.08. Peace talks between Russia and Ukraine are offering some support to the euro, also through the commodity channel as energy prices have halted their rally for now. We continue to see downside risks for EUR/USD in the near term, even if peace talks offer some temporary respite, and we still expect a break below 1.0900 soon.
GBP - British Pound
There are no UK data releases or Bank of England speakers today. Yesterday, the pound took a hit after BoE Governor Andrew Bailey delivered some dovish remarks, suggesting a less aggressive stance on tightening due to high levels of economic uncertainty. The markets continue to re-price BoE rate expectations which will continue to drive the GBP lower against the USD. That said, the eurozone appears more likely to suffer from the economic spillover of the Russia-Ukraine war.
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