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CAD Making Inroads Despite BoC Letdown

CAD Making Inroads Despite BoC Letdown

  • The CAD made some progress against the USD last week, although this may have more to do with overall USD weakness than a favorable perception of the CAD. The GBP/USD and EUR/CAD have both gained against the loonie and as the CAD has lost more ground on the crosses. In the coming weeks, we anticipate these crosses to trend somewhat higher (towards 1.40 for EUR/USD and towards 1.60 for the GBP). The Bank of Canada's rate decision fell short of market expectations for a 75 bps increase, as it increased its benchmark policy rate by only 50 bps and sounded a little more cautious about the future direction of policy. The market's perception that the Bank's decision may have set up a similar shift by the Fed, with the Fed indicating that tightening will be geared down to 50bps increments after this week's decision, is reflected in the fact that the CAD did not notably drop versus. Widespread pressure on the CAD will result if the Fed adopts a more hawkish tone, in contrast to the Bank of Canada's more cautious stance.

USD/CAD Technical Analysis

  • Some technical fundamentals have had an impact on the CAD. First off, there is a waning of the CAD's strong, positive association with US stocks. The correlation is still high at +74%, having reached a top of just over 90% two weeks ago. Spreads and commodities are the only other variables not currently exhibiting any statistically significant relationships with the CAD. Fair value assessments that take into account risk, volatility, spreads, and commodity prices suggest that spot is exactly where it should be. The coming week indicates a slight downside risk for spot within a band of 1.3445/1.3755.

The week ahead

  • This week is chock full of data. The Canadian calendar is light, but the October Employment Report is important. With the labor market showing some signs of cooling off and the Bank of Canada being cautious about raising rates, Friday is the focus. Thursday sees the release of Sep Trade figures. In the US, we receive a variety of Oct activity indicators, including (final) PMIs, ISM data, and Fed regional surveys. The ADP jobs report and FOMC decision are both scheduled on Wednesday. Factory orders and September Trade figures are due on Thursday. The NFP numbers are released on Friday; the early consensus estimate is +200k. The FOMC is largely anticipated to raise interest rates by 75 basis points, but the focus will be on future rise direction and whether policymakers signal the widely anticipated gentle "pivot" to a slower pace of tightening going forward.
  • This week’s USD/CAD range will likely be within 1.3450 -1.3750

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