The loonie suffered a steep devaluation last week, but most expect current levels to reverse
The US Thanksgiving holiday interrupted late-week trade, but it returned with a bang on Friday, with markets in high-anxiety mode following reports of a new Coronavirus variant detected in South Africa. The new strain has a lot more mutations than prior variants, which highlighted concerns about its transmissibility and vaccination resistance. The good news is that the variant appears to have been found early, and some nations have imposed travel restrictions as a result. Nonetheless, a large repricing of equities markets, rates, and commodities occurred swiftly, and the 3CAD, a currency more susceptible to risk movements, fell sharply. CAD Fair Value models suggest that the currency is undervalued from a fundamental standpoint.
While the current environment has seen a steep devaluation in the loonie, most analysts concur that the Bank of Canada tightening expectations will be more resilient than those of the Federal Reserve, where investors have pushed the first hike from June to September as a result of current market turbulence. Governor Macklem has also stated that the BoC’s primary goal is to keep domestic inflation under control while also ensuring that inflation expectations are well-anchored.
The week ahead:
Following last week's data drought, we are inundated with reports this week. Friday is a particularly busy day, with US and Canadian jobs reports, as well as maybe a greater than usual attention on the pay and earnings data that goes along with them. The ISM Manufacturing and Services figures for the United States will be released on Wednesday and Friday, respectively, and numerous Fed speakers are scheduled to appear.
Last week’s USD gains make the CAD look a little exposed in the short term with the USD/CAD looking to target the 1.28 level. However, it should be pointed out that USD gains through 1.28 have difficult to hold this year; expect very strong resistance over 1.28. Over the medium/long term, expect the loonie to strengthen on the back of earlier interest rate hikes by the BoC vis-à-vis the Fed.
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