Weekly Currency Update

• Last week, the CAD was on the defensive. Softer stocks are dragging on CAD sentiment, but it's difficult not to believe that markets and investors are being selective in their assessments of the CAD's drivers. The CAD weakened at the end of the week as US equities futures rose, and the CAD touched session lows on Friday morning when US equity futures fell short of their highs. In the short term, lower energy prices may be adding to CAD headwinds, but the CAD's linkage to crude oil has been weak in recent weeks, and crude's 50 percent+ climb since the start of the year should have done more for the CAD than its current YTD return of –3 percent against the USD.
• The broader CAD backdrop remains encouraging, in our opinion. The BoC will at least match the Fed's tightening moves this year, and robust (near record) commodity prices will continue to provide positive terms of trade advantages on the Canadian economy, according to most analysts. Under these circumstances, a somewhat stronger CAD remains a probability.

• So far this year, the CAD has been one of the stronger performers among the G10 currencies, second only to the USD, so these positives may be reflected in the exchange rate to some extent—but only against the USD. Near-term negative risks for the CAD are highlighted by fair value models, with assessed fair value (1.3199) higher than spot and the base of the expected range for the week ahead (1.2888).

• The United States' Federal holiday on Monday implies that markets will have a slow start to the week. However, both the United States and Canada will face some critical data points in the week ahead. The only economic reports for the week in Canada are April Retail Sales and May CPI; there are no consensus predictions for either at this time, but inflation is predicted to continue climbing after hitting 6.8% in April and likely reach above 7%. Following the 50-basis point hike in the policy rate at the beginning of the month, BoC policymakers have expressed a willingness to act "more strongly" if inflation continues to deviate from its objective.

• The Fed's move last week clears the way for a 75-basis-point boost from the Bank of Canada in July. Following the lifting of the FOMC blackout, policymakers in the United States are allowed to speak about the outlook, and several are scheduled to do so this week. Chairman Powell will make his semi-annual visit to Capitol Hill to speak with US lawmakers about monetary policy and the economy, and he is expected to emphasize the Fed's commitment to bringing inflation under control.

For the USD/CAD, a break above 1.3077 will increase risk s of pushing the pair into the 1.33 zone.