Weekly Currency Update

• The CAD had a terrible past week. Losses versus the USD have widened more than expected, but on some crosses, the CAD has been able to find some support. Focus on the BoC's policy hold compared to the Fed's more hawkish tone and soft equities drove USD/CAD through the mid-1.38s on Friday before weaker than anticipated attributes of the US jobs report (higher unemployment and soft wage growth) contrasted with an overall strong Canadian employment report to lift the CAD modestly.

US Equity Markets and Spreads Driving Direction

• Markets will probably continue to pay close attention to US rates and equity market developments for the direction of currencies in the coming week. Its correlation with US equity markets is continuing to weaken, which is excellent news for the CAD. That said, correlations with spreads, which have shifted further in favour of the USD last week, are strengthening, which is bad news for the CAD. Although it's unclear how much further term spreads can favour the USD at this point, hotter than anticipated US inflation this week will probably cause US rates to bounce and markets to reprice Fed forecasts a little more hawkishly. Based on our fair value estimate, the CAD appears to be undervalued—yet again—but recent movement of the components has been clearly in favor of a higher USD valuation. The USD has only modest upward potential from here in the next week inside a band of 1.36/1.39, according to an overextended USD.

The Week Ahead

• In terms of event risk, the week is off to a slow start. With the CPI, PPI, and Import Prices due on Tuesday, Wednesday, and Thursday, respectively, the American calendar is all about inflation. The week is concluded by Wednesday's retail sales statistics and March survey results. For markets, Inflation is the main concern and the main risk. Another strong CPI report may easily reverse the dovish response to Friday's US jobs and pay statistics. In response to the jobs report and the tremors in the US financial industry, yields also fell, but if this week's inflation readings are strong, those losses could quickly be reversed. Considering how little Canadian data is released, Manufacturing Sales and Wholesale Trade could help to further fill out the early 2023 activity pattern.

This Week’s Trading Range

• Technically, the USD/CAD should trade between 1.36/1.39 in the coming week. CAD may be finding a foothold in the mid-1.38s but a move under 1.3750 support is needed to drive more CAD gains to the 1.36s. Resistance is 1.3850/60 and the Oct high at 1.3972.