Weekly Currency Update

• The CAD extended its streak of sporadic weekly advances to six last week by scraping out a tiny gain against a sluggish USD. The "dovish hike" and the Bank of Canada's signal of a conditional pause in the tightening cycle, which most of us interpret to signify the cycle's peak, essentially met expectations. It’s over the Fed now and the coming Wednesday’s policy decision is also expected to reflect a moderation in policy making—a step down to a 25bps rate hike some sort of concession that rates are nearing restrictive.

USD and CAD Likely to Underperform

• With the EUR, GBP, AUD, NZD, and JPY all brushing up against some crucial, technical break out points against the USD, the overall USD trend is sluggish and may become considerably softer. The CAD (and the USD) will be at a relative disadvantage to the EUR, GBP, and AUD in the coming months, and we expect more CAD underperformance on these crosses because the ECB, BoE, and RBA are still actively tightening their monetary policy while the BOJ may be moving closer to abandoning its super-policy accommodation. The CAD can still outperform a lower USD, but there are currently few opportunities for prolonged gains. We continue to believe that the CAD will only improve more sustainably in the second half of the year when the global monetary policy cycle matures and risk appetite dramatically increases.

The Week Ahead

• On Tuesday, Canada releases its November GDP, on Wednesday its January Manufacturing PMI data, and on Thursday its December building permits. The better-than-expected growth profile for the Canadian economy in Q4 should be reflected in the monthly GDP data. There are several high-caliber releases and event risks on the US calendar. Both the ISM Manufacturing report and the Jan ADP statistics are released on Wednesday. The FOMC policy decision Wednesday afternoon is expected to result in a 25bps hike in the target rate to 4.50%. Powell’s press conference may concede that policy is getting closer to restrictive but there is still a bit more work to do. Policy makers have been quite adamant that the policy rate needs to get to a little above 5%. Data for January NFP and average hourly earnings are released on Friday (the early consensus call is for a 180k gain in jobs). The Jan ISM Services statistics are released later in the morning and are anticipated to rebound after falling below 50 in December. After dipping in Dec, the overall trend in US data surprises is still weak. Unexpectedly weak forthcoming data could increase fears about a slowdown into the first half of 2023.

This Week’s USD/CAD Technical Trading Range

• The week-ahead model anticipates flat trading in USD/CAD around the low 1.33s within a 1.3170/1.3485 range.