Ukraine Escalations Continue To Remain A Significant Concern
The CAD saw a fourth weekly close around the 1.27 level after another week of pretty modest volatility. With investors clearly gripped by the conflict on Ukraine's borders and a long weekend ahead of them in North America, the CAD is likely to stay risk averse and range-bound to begin the trading week.
The CAD is holding its own and imminent rate hikes likely to support the loonie
As the CAD has settled into an apparent comfortable range trade, short-term gauges of volatility have declined dramatically. Housing and house price data were strong, CPI came in above expectations, Manufacturing and Wholesale Trade data were positive (with upward revisions), and Retail Sales numbers were not as weak as expected for the Omicron-affected December period and showed a strong rebound in preliminary January data. DG Lane of the Bank of Canada said the bank was on schedule to raise rates in March and begin shrinking its balance sheet soon after. Markets continue to price March BoC rate hike risks a little more aggressively than and there are signs from recent BoC comments that a 1/2-point hike is being considered.
The week ahead:
Various models show that the CAD is likely very close to equilibrium. With no domestic data due this week, the CAD will be driven by external events (US data, Fed speakers) and the risk backdrop (stocks, Ukraine). Support for the USD/CAD is at 1.2630, while resistance is at 1.2790. If the USD/CAD breaks 1.2800 decisively, the currency pair could accelerate toward the 1.30 level.
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