In Canada, the week concluded on a rather low note as market participants prepared for the Victoria Day long weekend. With only March Retail Sales on the agenda, the week ahead does not look promising in terms of domestic statistics. The broader focus of recent data reports, however, is that growth and inflation are outpacing the Bank of Canada's expectations, and as a result, markets are pricing in a much higher risk of a 75bps hike at the June BoC meeting, while expectations for the June FOMC have dipped a little over the 50bps mark.
FOMC is likely to 50bps rates hikes in June & July
This week's US data reports could provide further light on the soft patterns that have surfaced so far in May; the attention will be on Tuesday's PMIs and Richmond Fed Index, as well as Thursday's KC Fed Manufacturing Activity Index. The Fed's rate path appears to be quite clearly spelled out at present (50 basis points for June and July, then re-evaluate; no need for +75 basis points at this point). We believe the dollar is becoming more vulnerable now that the Fed's tightening cycle has been fully discounted and the yield differential cycle has reached its top. Weak economic data will keep the USD from advancing further. Check Live Exchange Rates.
Look for the CAD to strengthen into the summer months
With little on the domestic calendar to move the CAD until late in the week, we rely on external factors such as the overall USD trend and flows, equities, spreads, and commodities prices. At the start of the month, we became more concerned about the broader USD trend and believe that there are increasing signs from the price action that the USD rally is prepared to retrace, at the very least, and that the rally's peak may be nearing. Due to the steep falls in US stocks this month, some USD-positive month-end rebalancing movements may occur next week. The CAD's positive connection with commodities continues to tighten—a potential plus—while the linkage with equities markets appears to be peaked. We feel that modest USD/CAD gains remain an appealing selling opportunity and that USD gains beyond the 1.29/1.30 zone—the top of our predicted range for the week ahead—are restricted. The USD/CAD rate is expected to be 1.25 by the end of Q2.
This week’s USD/CAD estimated range is 1.2650 – 1.2900
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