CAD - Canadian Dollar Remains An Underperformer But Not For Long
The week ahead:
On the surface, the CAD has been a classic story of missed chances last week, with the currency lagging all its major peers and failing to take advantage of a lower USD and a rise in crude oil prices. Despite significant advances in commodity prices (the Bloomberg Commodity index reached its highest level since 2014 last week) and rising domestic interest rates, the CAD has started the new year poorly and remains an under-performer across the G10.
Technical analysis implies that a modest CAD undervaluation against the USD currently exists—and that USD upside progress should be limited—but also notes decreasing CAD correlations with stocks and commodities. Despite recent losses, most analysts remain optimistic about the CAD's long-term prospects. Bullish CAD fundamentals—strong growth prospects and tighter monetary policy that will set the tone for other major central banks (including the Fed)—lead us to believe that the currency will improve more noticeably in Q2 and Q3.
The coming week may bring more of the same. The Canadian/US calendar is quiet this week, which is to be expected after the jobs numbers, but Governor Macklem is scheduled to speak on Wednesday. Following the meeting, the governor will talk to the media, where he will most likely be asked about the policy outlook and may express support for the CAD. The Fed's Mester speaks on Wednesday as well, and he may provide the Fed's early reaction to the stronger-than-expected payroll number. The USD/CAD range for this week is 1.2570 – 1.2790. It's worth noting that if the pair breaks beyond 1.2800, gains could continue well beyond 1.30.
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