Further USD Strength Against The CAD Seems Limited
Last week, there was little movement in the USD-CAD exchange rate; FX has outperformed even as equity markets have weakened. Commodity prices have remained well-supported to close the week. The CAD’s performance has reflected the broader moves in the USD and the currency does not seem to be taking its cues from interest rate spreads or commodities/equities. The current environment suggest that the CAD is at the mercy of broader market themes.
This week’s scheduled is jam-packed
Although the coming week's data schedule is jam-packed, the US NFP payroll report on Friday should provide FX markets yet another justification to remain stationary rather than widen ranges. Following the "monster" Jul report (+528k), the early forecast for the NFP print is a 295k increase in Aug jobs and a 3.5% unemployment rate. A number of Fed speakers, including Barkin, Mester, Williams and Bostic, are set to speak in the upcoming week. Q2 GDP is expected to remain relatively robust and might come in hotter than the 4% rate anticipated by the BoC. Strong growth and persistent inflation should keep risks tilted towards another stiff rate hike on September 8th.
Boc likely to outpace Fed rate hikes
Strong Canadian growth indicates that, despite the obvious slowdown in the housing sector, the economy will remain resilient in Q3, and should give the CAD a strong backstop, at least when compared to the USD. Analysts maintain that the USD appears fully priced, but that markets may not fully understand the possibility that the Fed will only raise interest rates by 50 basis points in September while the Bank of Canada will continue to tighten policy with a relatively more aggressive move the following month. The US data trends have considerably slowed down, which is consistent with the idea that Q1 saw the top of US inflationary pressures. The robustness of the Canadian economy, meanwhile, points to a more aggressive response from BoC policymakers. Fair value models suggest a modest CAD overvaluation and we think fundamental risks point to the CAD doing a little better in the next week or so. USD/CAD supply in the 1.3000/50 zone should continue to cap spot gains.
This week’s trading range
For the week ahead the USD will remain well-supported on dips to 1.2875 and expect the 1.3075 area on the topside.
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