Weekly Currency Update

The CAD’s recovery from the mid-April low stalled last week. Recent market focus has been on resilient US economic data, rising US yields, and the repricing of Fed rate cut risks. Fed comments have highlighted concerns about whether policy has been tight enough to curb inflation. US/Canada spreads have widened, with the 2Y cash bond spread near +75bps, the biggest USD yield advantage since April and close to multi-year peaks.

Technicals indicate moderate CAD undervaluation, though it’s closer to fair value at 1.3640. The CAD's correlation with risk appetite has increased. Stocks have been strong, fueled by rate cut expectations and strong economic data, but seasonal weakness in May and last Thursday’s drop for the S&P 500 suggest potential turbulence. Even if spreads are steady, weaker stocks may keep the CAD defensive. There is limited upside for USD/CAD beyond recent highs of around 1.3850 in the near term.

Today’s US Memorial Day holiday starts the week quietly. US data highlights include the Conference Board’s Consumer Confidence for May on Tuesday, Q1 GDP revision on Thursday, and April Personal Income and Spending on Friday. The Core PCE Deflator is expected to rise 0.3%, keeping the Y/Y pace steady at 2.8%. The Fed releases its Beige Book on Wednesday. In Canada, Industrial Product price data (Tuesday) and Q1 Current Account balance (Thursday) are unlikely to impact markets. On Friday, March and Q1 GDP data are expected to show moderate growth, with forecasts anticipating a 0.1% increase in monthly industry-level output, below the BoC’s 2.8% forecast. This is the last major data report before the June 5th policy decision. This week’s trading is between support at 1.3600 and resistance at 1.3740/50.