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  • Weekly Commentaries

The CAD is Finding it Difficult to Stand Out


  • Another bad week for the CAD as it lost ground to a weaker-than-expected USD. The CAD is finding it difficult to stand out among its major currency counterparts in a favourable way. While the BoC rate freeze is expected to remain, the Fed and other key central banks are raising interest rates, while investors are arguing whether the Fed's tightening cycle will last longer than originally anticipated by the markets (which seems very possible). Price movement on Friday revealed the CAD's challenges in gaining any ground.

Spreads Driving USD/CAD Direction

  • The majority of fair value models suggest that the CAD is considerably undervalued. The noticeable decoupling between the CAD and the S&P 500 is an intriguing trend. Spreads are once again the main factor influencing the CAD—at least for the time being. There is minimal prospect of any shrinking in the US/Canada 5Y spreads, based on this week's developments (unchanged BoC, possibly hawkish-sounding Fed) (which have widened against the CAD to 70bps, the biggest yield gap over the USD since Dec).Observe the USD/CAD trends.

The Week Ahead

  • Although the data calendar for the upcoming week appears sparse, it is significant. Prior to Friday's employment report, the Feb. Ivey PMI and the Jan. trade statistics in Canada are the early-week headlines on the economic data front. The BoC policy decision is without a doubt the week's high point . Without a doubt, the Bank's "conditional" suspension will continue. Yet, the policy statement may acknowledge the labor market's resiliency and sticky core inflation, which could make it sound a little hawkish. Market pricing reflects the belief that the BoC will resume tightening its monetary policy later this year, but the Bank this week may not give much of a signal in that direction. It is NFP week in the US, and markets anticipate a 220k increase in employment and an increase in hourly wages. On Tuesday, Fed Chairman Powell will present the Senate with his semi-annual report on monetary policy. As long as inflationary pressures remain high, Chair Powell runs the danger of seeming hawkish. While more tightening is undoubtedly a possibility, he might not give much insight into whether the Fed will stick with 25 bps raises in March or switch back to 50 bps hikes.

This Week’s USD/CAD Trading Range

  • Technically, Support is 1.3535/55 (and I would expect that to hold early next week, at least). Resistance is 1.3665, ahead of 1.3700/10 and 1.3830.
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