Last week, the CAD added to its gains versus the US dollar and many of its G10 counterparts, and it appears that the surge will continue in the near term. A USD close well below the mid-1.27 zone has signalled a loosening of the choppy range trade that has characterised the USD/CAD range since mid-January. Firmer commodity prices, as well as a decrease in broader market volatility, have aided CAD gains in recent days. Crude oil prices and the market volatility index tended to move in lockstep during the early stages of Russia's invasion on Ukraine, indicating market concerns about energy market disruptions affecting growth prospects and equities market dynamics. Markets appear to have been more able to "live with" the risks associated with the conflict as they are now known in the last week or two, despite the fact that the combination of increasing interest rates, rising inflation, and the conflict suggests major headwinds for risk assets.
The week ahead:
It was a quiet week for Canadian economic news, and another quiet week is on the way in terms of data. In the short run, however, we expect the CAD to be well supported; growth fundamentals are strong, Canadian short-term yields have typically kept pace with US yields, and rising commodity prices continue to support the loonie.
This week, Canada only has a pair of data releases (Jan GDP and Mar manufacturing PMI), whereas the US data schedule is much busier, and the week concludes with the latest jobs report. The early forecast for a solid +47k increase in US NFP should boost expectations for a Fed rate hike in May by 50 basis points. Market pricing suggests an 80% chance of a 1/2-point hike, a level of discounting that makes the Fed's job of raising aggressively much simpler, if not a foregone conclusion. It's worth noting that the BoC's April meeting is expected to face similar dangers, according to Canadian estimates. Observe the foreign exchange rates.
USD/CAD trading range and forecast:
Over the last few weeks, the CAD has been on an almost unstoppable upward trend. The dollar has dropped for eight sessions in a row, and losses may be due for some form of correction. The USD/CAD is expected to trade between 1.24 and 1.26 this week. There's also a growing belief that the loonie will strengthen further, maybe to 1.21 by mid-year and 1.20 by the second half of 2022.
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