While USD/CAD reached highs of 1.28 on Friday, the USD's late-week decline has left the CAD as one of the best performing major currencies, second only to the USD. The CAD's recovery from its lows indicates some USD consolidation/weakness in general, as well as some equities stabilization following a bad month for US stocks. The volatility index momentarily fell below 30, but if the CAD is to rebound further from here, calmer markets will have to prevail—which is not a guarantee. Note that current fair value models suggest that the CAD is slightly overvalued, implying that short-term CAD gains are restricted.
CAD Capped below 1.29
The macro fundamentals are supportive of the CAD, and most remain optimistic about the CAD's long-term prospects. In contrast to many of its counterparts, Canada's economy maintained strong momentum in the early part of the year; industry-level GDP climbed beyond estimates, and the flash estimate for March GDP is a respectable 0.5 percent. With the PMI and employment report this week, we get a glimpse at April patterns. Few other countries can match Canada's fundamental backdrop of steady growth and rising interest rates. For the time being, this may suggest that CAD weakening (beyond the 1.29 level) is restricted rather than large upside possibilities.
The week ahead
This week's data for North America is top-notch, with PMI and ISM data for both Canada and the United States, as well as trade and employment statistics for both countries. The early consensus is 390,000 non-farm payroll job increases (+431,00 in March) and a 3.6 percent unemployment rate. The FOMC meeting on Wednesday is certainly the main focus; markets are pricing in a 50bps raise and will be looking for the policy statement to confirm expectations of more "expeditious" hikes in the future. In addition, the BoC has two speaking engagements. On Tuesday, Senior Deputy Governor Rogers will talk, and on Thursday, DG Schembri will speak. Neither event will focus too much on the near-term policy outlook, which has already been determined by Governor Macklem's recent comments, which indicate that a 50bps raise in June is likely.
This week’s trading range
Despite last week’s push on in the USD to the upper 1.28s, the USD/CAD is likely to consolidate in a range between 1.2650 – 1.2900 in the week ahead.
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