External Influences Continue To Dominate CAD Sentiment; Boc Ahead
On the surface, the CAD had a bad week last week, with external issues continuing to dominate sentiment and currency movement. The USD's recent gains above the recent range peaks at 1.2790/00 correspond to a poorer outlook for the CAD in the immediate term, and broader market worries signal that the CAD's upside potential is fairly restricted for the foreseeable future. Last week, the fair value estimate for the loonie fell dramatically, suggesting that the jump in volatility index from the stock market drop continues to exert a strong influence over the CAD’s performance.
The week ahead:
The week ahead is chock-full of data from Canada and the United States, but the focus on the domestic front will be the Bank of Canada's policy announcement on Wednesday. Although this is a "policy statement only" release (no press conference or MPR), Governor Macklem will present the Economic Progress Report the next day to provide some further context for the BoC's decision. Markets are pricing in a 25-basis point hike on Wednesday, and while other pricing measures suggest a higher risk, 1/4-point movements are expected to characterize a "deliberate" approach to what policymakers have described as a significant shift in the Bank's monetary policy settings going ahead. The policy statement (or the governor’s speech) may provide more insight into the plans over the coming months.
We believe the statement will be hawkish, but with a 1/4-point hike already priced in and markets expecting a succession of rate hikes throughout the year, there is little room for the Bank to go much further than market expectations. It should, however, emphasize the direct economic threats that Russia and Ukraine face, as well as the potential for inflation to rise as a result of rising oil, metals, and agricultural costs.
USD/CAD currency range for the week 1.2650 – 1.2950
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