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Weekly Currency Update

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Canadian Inflation Expected to Spike

Canadian Inflation Expected to Spike

  • The CAD has had another tough week, struggling to stave off the USD's broad rise amid relatively low risk appetite and high volatility. In both fair value models and FX range estimators, these trends continue to imply near-term upside risks for USD/CAD. However, we believe the fundamental background for the CAD is more favourable (strong growth, hawkish central bank, favourable terms of trade) than the past week's 1% decline against the USD, which resulted in a surge over 1.30.

CAD/energy correlations have been faltering

  • Compared to its high historical association with energy and commodities prices, the CAD is exhibiting a more favorable link with US stocks and a rebound. The correlations between energy and metal prices are improving, although they are still below statistically significant levels. Still, after a period of low correlated market movement, it's possible that FX is on the verge of a "regime transition," in which more habitual linkages become more prominent.

The week ahead

  • This week's data for Canada gets a little more interesting, with the April CPI (Wednesday) topping the list. There are no consensus projections for CPI. After a huge 1.4 percent advance in the month, prices rose 6.7 percent in March. Short-term inflation dynamics reveal that price rise pace in Canada has accelerated in the last three months compared to the US, implying that Canadian prices may not yet reflect the deceleration observed in the US data last week. Regardless, the Bank of Canada's inflation target remains uncomfortably high, and rate hikes are expected to accelerate in the coming months.
  • Forecasts anticipate 50 basis point hikes in Canada at the June, July, and September policy meetings (followed by two 25 basis point hikes in Q4), and while we expect the Fed to follow a similar pattern, US policymakers appear to be leaning toward 50 basis point hikes only at the next two meetings, according to Chairman Powell (who speaks on Tuesday, along with many other Fed policy makers). The Empire Manufacturing and Philly Fed surveys, as well as the NAHB Housing Market Index, are among the first May economic reports to arrive in the United States. The impact of inflation on consumer activity will be determined by April retail sales. We believe the USD is more vulnerable to weak or disappointing economic data, which might weaken longer term Fed rate hike expectations.

USD/CAD currency outlook

  • The CAD finished the week on a slightly bullish note, moving back from the 1.3050 level at Thursday's close to the 1.29s on Friday. We predict the loonie to trade between 1.2750 and 1.3050 for the week, with the USD remaining robust and trading above the peaks that characterized the top of the range during the last year. Observe the foreign exchange rates.

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