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Weekly Currency Update

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The U.S. dollar has Experienced Significant Appreciation

The U.S. dollar has Experienced Significant Appreciation

  • The USD has made large gains, and some of the major currencies have suffered heavy losses beyond the CAD's 1% decline versus the US dollar over the previous week. Notwithstanding the CAD's decline last week, it was not unusual for the USD to have broad gains. The markets' growing optimism that the Fed's tightening cycle would continue for a little longer than anticipated has contributed to the USD's rise. The core PCE numbers for January were released on Friday and provided support for that belief. A further 75bps of tightening over the upcoming three FOMC meetings is completely priced in by the markets. The odds of the BoC tightening policy again are increased by this shift, but the threshold for further tightening in Canada now appears to be very high. While longer-term rate differentials are largely stable, spreads, which are a modest USD-plus, are beginning to widen once more in favour of the USD. Given that the CAD still has a high, positive correlation with US equities, weaker stocks continue to be a key challenge for the currency.

Fair Value Models Suggest Sustained USD Strength

  • Our value models show some short-term overvaluation of the USD; this could impede near-term USD gains against the CAD. It's crucial to note, however, that in recent weeks, the model's input variables have been shifting in favor of a higher USD. All things considered, a stronger USD in the short term—or at the very least, a USD that is well supported on modest pullbacks—seems to be a very possible outcome. Models predict little room for CAD advances next week and a probable range of 1.3460/1.3770.

The Week Ahead

  • There aren't many high-profile Canadian releases scheduled for this week, and there aren't many central bank speakers either. The Dec. and Q4 GDP numbers for Canada are likely the most important ones (Tuesday). Building Permits are released on Friday, while the February S&P Global Manufacturing PMI figures are released on Wednesday. Domestic data releases aren't likely to have much of an immediate impact on market mood. The Bank of Canada has obviously withdrawn and is likely to keep a neutral stance for some time (even if markets continue to price in a return to tightening around mid-year). Highlights in the US include the Jan durable goods data (Monday), the Feb consumer confidence data from the Conference Board (Tuesday), the ISM Manufacturing data (Wednesday), and the Services data (Friday). While investors continue to consider the prospects for Fed policy, the price components of the ISM data may be the most intriguing portion of these data reports.

This Week’s USD/CAD Trade Range

  • Technical factors point to a sustained USD uptrend versus the CAD. Look for the USD/CAD to trade between 1.3460/1.3770.

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