The volatility of last week's currency moves were highlighted across all FX markets. A week after a blockbuster US jobs report which appeared poised to keep the USD well-supported, the USD finds itself trading a bit more defensively following evidence that inflationary pressures in the US are weakening. The wider swings in the USD last week may have overstated the fresh information we learned from the US CPI and PPI data, but it could just be a summer phenomenon. Markets are still pricing a rate increase by the FOMC in September at a range of 50 bps to 75 bps.
The week ahead
Pricing interest rate hikes in Canada has a history of following the Fed funds. Markets seem to be betting that this week's release of Canadian CPI data will reflect the US headline inflation rate and print lower than expected. Despite the move in swap rates, we do not believe that the risks of a 75bps hike in Canada have significantly decreased, even though the Fed may now be leaning toward a 50bps hike in September. Price pressures in Canada appear to be relatively sticky, and the Bank of Canada is running a clear campaign to explain its policy-tightening moves, even as Canadians are beginning to feel the pinch from tighter budgets. Last week, the Bank expressed its resolve to restore price stability in a brief Twitter thread. Beyond the CPI, Canada's higher-profile data releases this week includes Manufacturing Sales, IPPI, and Retail Sales. The August NY and Philly Fed survey results, housing, industrial production, and retail sales statistics, together with the July FOMC minutes, are among the US releases.
Could the CAD appreciate in Q4?
The CAD still trades a little "rich" in comparison to our basic fair value estimate, but we observe that the modelled outcome has significantly improved over the past week, and there is a growing association between the CAD and US stocks. The backdrop should support some short- to medium-term gains in the CAD if this is the trough for equities markets. Although we still expect the USD/CAD exchange rate to be 1.27 at year's end, if the risk environment does really improve, risks may be shifting toward a little weaker USD and higher CAD.
This week’s trading range 1.2700 – 1.2950
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