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CAD Fundamentals Remain Strong; But Loonie Dragged By Risk Appetite

CAD Fundamentals Remain Strong; But Loonie Dragged By Risk Appetite

  • In response to a very uncommon net weekly gain for US equities markets, the CAD concluded the week with a slight gain versus the USD. Although weaker commodity prices shouldn't be disregarded, the CAD's fortunes continue to be highly correlated with the current risk environment. Despite easing back to its lowest point since March, the Bloomberg Commodity Index is still up more than 30% year-over-year. However, as fears about global growth deepen, copper prices have fallen by about 20% so far in June. Over the same time period, the price of crude oil has decreased by about 7%. Recession threats may affect crude prices to some extent, but restricted supplies, constrained room for output growth, and worries about energy security indicate that crude prices may stay reasonably high even if recession fears intensify in the upcoming months.

CAD Fundamentals remain strong

  • Going into Q3, the majority of analysts are still optimistic about the CAD. The robust economy and the Bank of Canada's policy stance, which leans hawkish, are key factors supporting the CAD. Strong April retail sales statistics released last week, which showed respectable volumes as well as price increases, continue to support steady growth patterns in Q2. Although tight labour markets and growing compensation should partially halt spending, weaker housing market data points to the possibility of some consumer restraint later in the year. The Bank of Canada will need to continue with its tightening plans for longer than its counterparts, and probably a little more forcefully than others in the coming months. Strong growth combined with strong inflation, which offered another upside surprise for price measures, also suggest aggressive tightening by the BoC. However, unless the overall risk backdrop calms down, the CAD might not be able to reflect many, if any, of these advantages in its currency valuation.

Not much happening this week

  • This week's data schedule is extremely light, and market activity still has a strong holiday vibe. The only noteworthy data report in Canada is the GDP for April. The weekend before July 4th is bracketed by Friday's Canada Day market shutdown, so liquidity and participation are quite likely to remain on the low side. The coming week in the US includes a number of significant data points. We receive further information about regional Fed action, a new interpretation of the June Consumer Confidence number, and June ISM Manufacturing statistics.

This week’s USD/CAD range 1.2685 – 1.3075

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