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Could last week’s CAD gains continue?

Could last week’s CAD gains continue?

  • Although investors may be a little hesitant to sell the USD too aggressively ahead of this week's FOMC meeting, the CAD ended a generally favourable week on the verge of another rise up versus the USD. In contrast to a generally weaker USD, the CAD had a generally good week, increasing by about 1.3 percent and moving farther away from the 1.30+ levels that resulted after markets responded poorly to the Bank of Canada's 100bps rate hike. As a result of slightly slower-than-anticipated price growth in Canada, which was reported in last week's inflation statistics, markets are now pricing in approximately 62 basis points of increases for early September, effectively hovering between a 1/2- and a 3/4-point increase.

Could the loonie gain over the USD?

  • Gains in the Canadian dollar last week against the US dollar were a result of a broader demand for commodity currencies, despite obvious warnings from global GDP indicators about a worldwide slowdown. Although US equities markets have rebounded, we observe that through July, the CAD's association with risk appetite has significantly decreased. That said, the link between the CAD and other commodities, including crude oil, has slightly increased recently. This may be encouraging news as it shows a shift in the CAD's focus to domestic factors amid indications that the recent decline in commodity prices is stabilizing. Commodity prices are unlikely to withstand more pronounced indications of sluggish global economy, although it might take weeks or even months before recession fears are more obvious. This may open a window of opportunity for the CAD to push on a little more against the USD short run.

The week ahead:

  • Only the weekly Nanos consumer confidence reading, and the May monthly GDP report are being released for Canada this week; growth is anticipated to be somewhat slower than April's +0.3 percent M/M read, but data points to the fact that the Canadian economy is still quite strong. The Conference Board Consumer Confidence statistics, the Dallas Fed Manufacturing Index, more housing price data, durable goods, and personal income/spending are among the US releases. The FOMC decision on Wednesday and Chair Powell's press conference after the rate announcement, however, are the highlights of the week. Consensus expectations call for a 75bps hike and markets are pricing in a fraction more than 3/4 of a point of tightening after policy makers’ comments prior to the blackout period steered expectations away from a 100bps hike despite the jump in inflation to 9.1% last week. As such, how Powell steers market expectations for future policy moves is likely to determine the USD’s reaction to the decision.

This week's USD/CAD range 1.2685 -1.3075

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