Weekly Currency Update

• Another week of underperformance for the CAD is to be expected. Against the USD and most of its main currency rivals, the CAD has fallen 1.3%. The expected outcome of the Bank of Canada's policy decision—a 50bps hike—came and went, but at least it left the possibility of a small amount of additional tightening early in the new year. The Bank's communications indicate that it is close to ending its cycle of tightening while it "considers" whether more tightening is necessary. A further 25bps in H1 of the next year is 100% likely, according to the swap market. More details might be revealed in Governor Macklem's year-end statements early the this.

CAD Direction Continues to be Influenced by Equities

• The USD is currently trading at a premium to fair value estimates (1.3483) but the CAD has declined along with US equity markets last week, highlighting the continuing significant impact of risk appetite on the CAD's short-term performance. The level of correlations is still quite high (90%+), and the direction of the CAD will continue to be significantly influenced by equities in the upcoming week. Our analysis of the likely range for USD/CAD for the coming week indicates that a very slight downside risk exists within the range of 1.3420–1.3750 due to the overvaluation of the US dollar. We continue to look for the USD to weaken in the medium term— the top of the Fed tightening cycle is close and markets will soon start to anticipate the cycle peak and possibly lower rates next year. The same is true for the Bank of Canada, but the CAD should benefit from a sustained improvement in risk appetite as the Fed cycle transitions.
• Calendar risk this week is meaningful. Canada releases Manufacturing Sales (Wednesday), housing data (Thursday) and Wholesale Trade (Friday). The main event risk comes from the US. Tuesday’s Nov Small Business Optimism Index is worth watching for further signs of weaker pricing power among businesses. The Nov CPI report itself is out the same day. Wednesday’s FOMC meeting is expected to result in a 50bps hike. The Dec regional Fed surveys get going Thursday. December PMIs are out Friday.
• This week’s trading range is likely between 1.3350 – 1.3750.