The Softer Trend in Commodities

21 Nov 2022

Last week, the CAD underperformed most of its major currency rivals, continuing a trend that has been observed over the past few weeks. Losses on crosses including EUR/CAD, GBP/CAD, and CAD/JPY, appear set to increase as the CAD continues to struggle to emerge from the wider shadow cast by the USD. Although we note that Terms of Trade are emerging as a substantial influence on spot volatility over the past month, correlation matrices continue to reveal that the equity/CAD link is still the most important driver for USD/CAD. This is bad news for the CAD since earlier this year, when commodity indexes were skyrocketing to multi-year highs, Terms of Trade offered the CAD little to no support.

The softer trend in commodities that has been present since the middle of the year now seems to be having some effect on the performance of the CAD. According to spreads, risk appetite, and commodity prices, fair value models indicate that spot is currently at around current levels (1.3372), which is what we would have anticipated. The valuation model's forward-looking component predicts tight trading in the coming week within a band of 1.3210/1.3530. While USD sellers should aim for the high 1.34s, USD buyers should take advantage of USD declines to the low 1.32s. However, ranges may be drastically narrowed next week due to limited trading and low volatility.

It’s a very quiet week for data releases in North America. Wednesday is when the majority of the US data reports are to be released—including Durable Goods, Initial Claims, PMI data, and the Nov. 2nd FOMC minutes. The US Thanksgiving holiday practically guarantees that there will be very little trade. Aside from the economic reports, a few Fed officials have speaking engagements (all on Tuesday), though not all of them will concentrate on policy outlook. The only significant data release for Canada is the Tuesday update on Sep retail sales.

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