FX Week ahead: Covid Waves Throw a Wrench Into any CAD strength
USD: Its all about treasury yields
Spot
DXY92.30
Week ahead bias
Mildly Bullish
Weekly range
92.00 -93.00
1 month target
92.00
US Treasury yields continue to dominate the FX market with correlations becoming even more stronger over the past week. Most analysts continue to predict a similar environment in the coming weeks with higher yield expectations. The US is likely to print a very strong data set this week - US Retail Sales are expected to be higher driven higher by stimulus checks, Industrial production driven higher by better weather and an expectation of a higher CPI print. Put together, a perfect environment that should contribute to higher UST yields.
The greenback is still likely to remain supported across most of the G10 but commodity FX (aka CAD) may outperform if this week’s Chinese data print on the strong side – March trade data and Q1 GDP. The markets will also be hearing from the Fed with the Powell expected to speak as well as the Beige book on Wednesday.
CAD: Covid wave number three to cap any upside
Spot
USD/CAD1.2554
Week ahead bias
Neutral
Weekly range
1.2500 1.2640
1 month target
1.2575
Very strong jobs data for March (unemployment rate down to 7.5%, 300k increase in employment) failed to generate a material rebound in the CAD. While the price of crude may have played a role, the worsening virus situation in Canada continues to depress any expectations for a loonie rebound. Most provinces have taken quick measures to contain the violent third Covid wave, and markets are inevitably starting to reassess their recovery expectations for the Canadian economy.
Canada is still lagging significantly behind the likes of the US when it comes to vaccinating its population. The release of the BoC Business Outlook survey for 1Q21 should also have a more limited impact as markets may deem it outdated in light of fresh virus-containment measures. The tapering announcement on 21 April by the Bank of Canada may be the light at the end of the tunnel but given the current environment, USD/CAD upside may be capped in the short term.
EUR: Any perceived euro strength will have to wait a little longer
Spot
EUR/USD1.1885
Week ahead bias
Mildly Bearish
Weekly range
1.1790 -1.1900
1 month target
1.2000
The EUR/USD is likely to see a drop back down to the 1.1800 levels again this coming week driven predominantly by higher US Treasury yields. The euro may gain some support from a EUR recovery story with vaccine programs gaining traction and some better than forecast economic data. That said, with the EU Recovery Fund stuck in a German courtroom, EUR strength may have to wait until later this year.
This week’s economic calendar does have some market moving events. We’ll hear a couple of times from ECB President Lagarde as well as see the eurozone’s February retail sales and industrial production – plus the German April ZEW investor survey. We may continue to see more EUR/USD consolidation in the weeks ahead before the pair makes a move higher toward the latter part of the quarter. A sustained break above the 1.1900 area would be a surprise.
GBP: Last week’s perfect storm has cleared
Spot
GBP/USD1.3731
Week ahead bias
Mildly Bullish
Weekly range
1.3600 – 1.3960
1 month target
1.4200
The GBP sold off last week on vaccination concerns before the UK regulator pointed out that the balance of benefits and risks still favours the AZ vaccine and the UK government reiterated that its plan to offer the first dose to all adults by end July remains intact. This means that the GBP is likely to remain supported and move back toward the 1.40 level as we get closer to the summer.
On the data front next week, we have Feb industrial production (Tuesday) and monthly Feb GDP (Tuesday). None should have a meaningful effect on the GBP. Short term, the GBP will continue to gain support from vaccination expectations and broader market themes.
Currency Chart
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