Canadian Dollar Weekly Outlook – The loonie's rise likely to stall this week
The Canadian dollar finished the week barely altered, unable to recoup losses against the US dollar from last week's low of 1.2430. The short-term bounce in USD/CAD shows some danger of CAD depreciation, but we believe the overall view for the CAD is positive, and that the space for CAD losses remains limited.
Canadian Domestic Fundamentals
Last week's domestic data run was, in essence, pretty limited. However, the domestic economy continued to shrug off headwinds (Omicron-related) in January, rising 0.2 percent M/M, in line with expectations, while preliminary data for February showed 0.6 percent M/M growth; solid growth data suggests the domestic economy is well ahead of where policymakers expected it to be in Q1.
The Bank of Canada's January MPR forecasted a 2.0 percent expansion in Q1, but market projections now suggest growth would be closer to 5%. Strong growth and above-target inflation raise the possibility of a faster rate of tightening in Canada in the coming months. This narrative is expected to be supported by this week's Canadian data. The Bank of Canada's business outlook survey could provide some light on employment and salary trends across the country. There are presently no predictions for the Canadian employment report, but growth trends suggest a strong month of hiring across the country; note that the 6- and 12-month moving averages for job growth in Canada both hover around 90,000.
USD/CAD Weekly Range
Crude oil prices fell on reports that the United States would release some of its oil reserve inventory, but with the ongoing crisis in Ukraine, the threat of more sanctions against Russia, and OPEC+'s limited ability to respond to rising demand, energy prices are likely to stay well supported. Last week, US equities markets struggled to gain traction, while market volatility decreased compared to earlier in March. Our weekly trading range suggests that USD/CAD gains are likely to be capped near 1.2587, with downside risks extending modestly to 1.2410. Fair value models suggest that USD/CAD is effectively right on its estimated equilibrium around the 1.25. Observe the foreign exchange rates.
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