With a gain of little more than 0.5 percent against a weaker USD at the conclusion of last week, the Canadian dollar now ranks in the centre of the G10 performance pack. After the 75 basis point boost executed last week, Fed Chairman Powell stated that Fed policy has achieved neutral, implying to market players that the majority of the Fed's tightening cycle is behind us. The USD dropped relatively dramatically against key currencies and continues to have a soft undertone. Risky investments responded by rising to higher values to close the week. Weaker than anticipated US Q2 GDP raised concerns about a possible recession and put additional pressure on the USD. By the end of the week the CAD itself was still having difficulty showing signs of improvement, despite the fact that stocks and commodities had firmed and that Canada's May GDP data had exceeded expectations, adding to what should have been a somewhat more supportive environment for the CAD.
The week ahead:
Important releases this week on the statistics calendar include Building Permits, PMI data, Trade, and the July Employment report (Friday). The preliminary estimate of +18k Canadian employment is based on a relatively small Bloomberg poll and is subject to major change before the official announcement. In recent remarks, the BoC has stressed the extremely tight labor market, and for the time being, that general assessment is unlikely to change. Gains in decent jobs will help the CAD. ISM, Trade and Jobs announcements from the US are somewhat comparable to those from Canada. The NFP is expected to increase by 250k, but if the reports support the light tone of the PMI, the ISM data may have a greater impact on price movement. There are a few Fed speakers scheduled, but we want to draw attention to the Bullard speech today since we think he serves as a good indicator of the regional Fed presidents' policy thinking. Remember that he recently said that in order to combat high inflation, the Fed may need to raise rates to 3.75–4 percent by year's end; any easing in his forecast will fuel speculation that the Fed rate cycle peak is approaching.
Could the BoC be too aggressive?
While the CAD has struggled to gain ground versus the USD, it has also made some progress against the GBP and JPY this week. Late last week, EUR/CAD dipped below 1.30, a new cycle low, before somewhat bouncing up to end trading on Friday. Although we find it difficult to understand the market's lack of enthusiasm for the CAD, our basic fair value model does indicate that the currency is still overvalued. Commodities have started to rise, which should give the CAD some support in terms of trading. Stronger stocks indicate that the lessening of risk aversion that we had anticipated to develop in H2 may be on the way, even though it is still early in the process. The quality of Canadian data surprises has slightly declined, and investors are clearly worried that the BoC's aggressive monetary policy stance could cause the domestic housing market to become unstable and that it won't hold up if the Fed stops its tightening in September. Canada's inflation appears to be more persistent, and we believe that the BoC's policymakers are driven to continue with more aggressive rate changes. Slower property markets are a possibility, but concerns of a crash appear exaggerated.
This week’s trading range: 1.2750 – 1.2950
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