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Primary Focus In Canada Will Be The BoC Rate Decision

Primary Focus In Canada Will Be The BoC Rate Decision

  • Last week, the CAD appreciated versus the USD, which was consistent with improved performance for risk assets and FX. Risk appetite continues to have a significant impact on the performance of the CAD from a correlation-driven perspective. Although the crude correlation with the CAD is still rather high, risk appetite—stocks—remains the clear force behind the loonie's trajectory. Even with the substantial intraday swings we have witnessed to conclude the week, fair value assessments for spot at 1.3760 imply the CAD is currently performing more or less as we should expect it to. Our week-ahead FX model predicts some relative stability for the CAD, but within a large band of 1.3615/1.3915. Even while the USD's overbought position is slightly improving, it may still make it difficult for the USD to rise much farther beyond recent peaks.

The week ahead

  • The coming week will see some important event risk for markets. The main topics of discussion in Canada will be on Wednesday with the BoC's policy decision, the Monetary Policy Report, and Governor Macklem's news conference. In response to last week's CPI data that came in stronger than expected, a 75bps increase is fully priced in. This will raise the overnight target rate to 4.00%. Most analysts predict that the bank will only tighten a little bit more before reaching a top of 4.25%. Any suggestions that the Bank would start "fine-tuning" rate increases will damage the CAD. It is unclear at this time if the Governor can make that compromise given the Bank's prognosis and the inflation rate, which is still high. It’s a busy week for data release in the US; the Oct PMIs get the week going, with the Conference Board’s Consumer Confidence report for this month due on Tuesday. The highlight of the week is likely to be Thursday's advance Q3 GDP data. Following weak results in Q1 and Q2, the US economy is expected to have a very strong quarter, according to GDP monitoring. Strong growth will benefit the USD and rates and could be detrimental to stocks (hurting the CAD).

This week’s USD/CAD trading range

  • USD/CAD price movement has been erratic; intraday movements on Thursday and Friday last week were particularly high. Despite the significant intraday swings, the USD has tended to revert back to levels close to opening prices at the end of the day. This kind of price movement is typical of markets that have become increasingly unsure of themselves. This might just last a short while, or it might be an indication that the market is beginning to tyre after a significant move.
  • From a technical perspective, resistance is located at 1.3975 (Oct 13th high) while support is 1.3660. USD weakness below technical support may open a move back towards 1.3500.

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