Weekly Currency Update

• The CAD ended the past week on a positive note. Several recent events contribute to this explanation. First, and most obviously, there was a 150k net increase in jobs reported in the Jan labor market report, of which 121k were full-time positions. Hours worked across the economy increased by a very strong 0.8% in the month, and wage growth is still very strong. The data point on hours worked indicates that the Canadian economy is off to a very strong Q1 start. More generally, the employment numbers strongly indicate that following a slowdown in hiring around the middle of last year, the labour market trends are now rebounding aggressively. For the BoC, this is not a welcomed trend because officials have emphasized that in order to attain price stability, the labor market must cool and wages must decline. Following Friday's report, markets have reacted by slightly increasing the probability of the BoC raising rates again around the middle of the year, while longer-term predictions have reduced the risk of a late-year BoC easing, suggesting that rates will remain high for longer.
• The sudden increase in crude oil prices last week as a result of Russia reducing oil production added to CAD gains. The effectiveness of this threat remains to be assessed, but during the past few weeks, there has been a stronger association between CAD and crude. A stronger link with rising prices for crude or commodities in general will be favorable for the CAD. Spot is trading roughly at fair value estimates right now (around 1.3350), which, other things being equal, should limit the potential for USD advances from here.

The Week Ahead

• In the upcoming week, Canada will only release a limited market moving data: Manufacturing Sales and Housing Starts on Wednesday, and Industrial Product Price data on Friday. The theme of the US data calendar is inflation. The Jan CPI report, which is anticipated to show further reduction in headline prices, kicks off the data season on Tuesday. PPI numbers are announced on Thursday, and import prices are revealed on Friday. Important announcements include the beginning of the February round of regional Fed surveys (NY and Philly Fed reports), as well as the important Feb NAHB survey and Jan housing starts and building permits. Additionally, a number of Fed policymakers, including Harker, Williams, Mester, and Bullard, will be giving speeches.

This Week’s Trading Range

• Technically the range for the week is 1.3295/00 to 1.3475/80. We still see CAD pushing lower toward 1.30 over the coming months.