The CAD's recovery was interrupted by a disappointing Canadian jobs report for August, which showed a 39.7k decline in employment, driven by a loss of 77.2k full-time jobs. Compared to the forecasted reading of 5.0%, the jobless rate increased to 5.4% but growth in hourly pay increased to 5.6. We believe that the hot wage growth print is the key aspect of the data prints in light of the Bank of Canada's most recent rate rise (+75bps, in line with expectations) and policymakers' obvious focus on still developing inflation pressures and heightened inflation expectations. Senior Deputy Governor Rogers noted after the policy decision last Wednesday that there were preliminary indications that the domestic economy was responding to higher interest rates, but that the economy was still in an excess demand situation and that the Bank was still "a long way from where we need to be" in terms of policy. The statistics should, if anything, increase anticipation that, after front-loading rate tightening, the Bank can switch to 50 bps rises starting in October.
CAD weakness likely capped
It's yet unclear how the current outlook will help the CAD. Fair value models continue to indicate that there are upside risks for USD/CAD, and the short-term movement of CAD is still primarily influenced by the current risk environment. Despite the BoC's aggressive tightening course, which has resulted in Canada having the highest policy rate in the developed world, it is still difficult for the CAD to separate from the larger pull of risk appetite and the overall tone of the USD. The USD gains toward the 1.32 area should continue to be at the upper end of the current trading range, at the very least, and the CAD should be able to retain recent ranges against the USD.
The week ahead
This week, there aren't many data releases for Canada; on Wednesday, manufacturing sales for July are released, and on Thursday and Friday, respectively, are existing home sales and housing starts. Additionally released on Friday are wholesale trade and international securities transactions figures for July. US data reports may help shape the rate narrative ahead of the FOMC decision on Sep 21st- in particular, the CPI (on Tuesday) and PPI statistics. Note that the consensus expects core inflation to increase (6.1% y/y, from 5.9%), but the headline CPI to decline (8.1% y/y, from 8.5%). Manufacturing surveys for September (NY and Philly Fed) and August industrial production figures are being released on Thursday. The week is concluded by preliminary U. Michigan Sentiment data from September and July TIC flows.
This week’s trading range
Technically, most expect the CAD to remain capped at around 1.32 with support located 1.2850/1.29 area.
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