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More Turbulent Range Trading Expected For The CAD

More Turbulent Range Trading Expected For The CAD

  • The events in Ukraine this week have overshadowed whatever we've seen in terms of economic or monetary policy, and it appears that geopolitical risks will continue to overshadow financial markets for some time. Despite the extraordinarily unpredictable geopolitical background, what has come from North America this past week shows that policymakers there are not being distracted from their focus on inflation and will continue to tighten monetary policy steadily.

The Bank of Canada raised rates, as expected, and hinted that there was more to come

  • The Bank of Canada raised interest rates, as predicted, and signaled that there will be more in the months ahead. Policymakers at the Federal Reserve have expressed similar sentiments. In both cases, policymakers were less certain about the prospects for balance sheet reduction, but what has emerged more clearly, we believe, is a stronger sense that policymakers at the Bank of Canada and the Federal Reserve believe they are currently behind the rate curve and must work to catch up. The fact that this has occurred to them at the same time as Europe faces its most serious conflict since WWII is unfortunate, but we believe that, despite developments in Europe, higher rates are likely in both Canada and the United States due to North America's relative isolation from direct Russian economic and financial ties.

Loonie closed the week around 1.2750 for the sixth straight week

  • While correlations remain broadly weak, the pick-up in the CAD/crude correlation suggests that WTI trading around $110 has provided a bit of a prop for the CAD through last week as the BoC tightened interest rates. The CAD, however, reverted to recent type and form as the week progressed, dropping amid additional stock market losses and finished the week around the 1.2750 level for the sixth week in a row. The CAD's failure to fully benefit from more hawkish monetary policy and rising commodity prices continues to worry investors. The CAD has however strengthened strongly against European FX, gaining significant ground against the EUR. Fair value market models suggest that the CAD is trading close to fair value now estimated at around 1.2816 against the USD. Check the USD/CAD Currency Conversion Chart.

The Week Ahead

  • The week ahead is weak on data, and Fed officials are in the black out phase ahead of their meeting on March 16th. On Monday, Canada reveals trade statistics, and on Friday, it releases employment data. The CAD's drop versus the US dollar last week signals that USD/CAD will trade in a volatile range for the foreseeable future. More turbulent range trading is expected, but the CAD is unlikely to weaken too much above the 1.28 level against the USD.

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