Canadian Dollar Weekly Outlook – CAD seems poised to appreciate
Over the past few weeks, the CAD dipped versus a relatively robust USD, but Friday's labor market data may provide a foundation for the CAD to reclaim some of the real estate it lost in late 2021. The Canadian labor market statistics appears to be solid with substantial gains in full-time employment driving the headline number above forecasts last week. Wage growth slowed a little, but hours worked across the economy was up 0.3% in December and BC jobs were flat, despite concerns about the impact of local flooding.
Job growth in the United States was disappointing (but wage growth rose, and the unemployment rate fell). Both the Bank of Canada and the Federal Reserve are expected to raise interest rates in March, however, analysts continue to look for relatively more tightening from the BoC through 2023. Markets continue to price in a strong risk of a late-January lift-off from the Bank of Canada; failing to deliver might be a modest setback for the CAD later this month.
The week ahead:
Weekly models show a decrease of CAD correlations with equities and crude oil prices. This should allow favorable domestic fundamentals to shine through a little more in the short run if equity markets continue to remain shaky. The weekly ranges suggest a little more upside with spot now trading at a fair valuation of around 1.2544. There are no domestic data reports due next week, so the CAD will have to rely on the momentum of the good jobs report to perform a lot of the heavy lifting if it is to advance towards the low/mid 1.25s.
In contrast to the scarcity of Canadian data, the US releases advance Retail Sales and CPI data, the Beige Book and certain Fed hawks have speaking engagements, so the road lower for USD/CAD is not obvious. For the time being, expect the USD/CAD to trade in a weekly range of 1.2500 – 1.2750, based on CAD strength.
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