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  • Weekly Commentaries

Banking Woes Continue to Pressure the CAD

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  • Last week, the CAD underperformed, falling behind the USD, which was generally weaker. The US dollar has declined as investors pay focus on the possibility of falling US interest rates in the midst of the simmering regional financial crisis in the US. The currency has been unable to gain any real "safe haven" support amid the volatility. The performance of the USD has been mainly influenced by the rapid evolution in Fed interest rate expectations. The FOMC's decision last week was moderately dovish; it included a 25 bps increase and a moderating of its forward guidance, indicating that the tightening cycle is almost over. Amid the pressure on the banking system, markets have now priced out any further Fed rate increases and are projecting possible rate cuts by year's end.

USD Likely to Extend Gains

  • The CAD has not benefited from the narrowing of spreads in its favor. If US yields keep declining, this might become a bigger issue in the long term because sticky inflation might make it harder for lower rates to take hold in the US. In reality, the CAD has lost considerable ground on the important crosses and has tended to trade more or less in line with the USD. Market turbulence continues to be a barrier for the CAD. The turbulence in the banking industry is, in part, blowing around the CAD. While the projected fair value is tracking lower, the spot rate is trending higher, possibly due to narrower spreads and rising crude oil costs.

The Week Ahead

  • Data and incident risk for Canada are very low for the upcoming week. On the statistics front, the Jan. GDP figures are released on Friday. The BoC's DG Gravelle will speak on Wednesday about the market liquidity actions the Bank took during the Covid epidemic. These remarks might not go too far into the outlook for monetary policy at the moment, but the summary of the discussions leading up to the Mar policy decision, which was released last week, removing any doubts about the likelihood that rate policy will be on pause for a while. Tuesday in the US sees the release of the Mar Conference Board Consumer Confidence report, housing statistics, and the Feb Wholesale Inventories. The final reading of Q4 GDP is released Thursday and Feb Personal Income/Spending data are out on Friday. Observe the USD/CAD trends.

This Week’s Trading Range

  • From a technical perspective, expect the USD to trade toward USD strength, possibly extending north of the 1.38 handle. This week’s trading forecast: 1.3650 – 1.3825.
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