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Weekly Currency Update

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USD rally crushes the loonie

  • After trading at the week's lows in the mid-1.24s, the USD/CAD finished the week over 1.27. The CAD's short-lived rise suggests it was beginning to take advantage of solid economic and inflation indicators that backed the Bank of Canada's aggressive tightening pace. The average of the Bank of Canada's three preferred core inflation indicators is rapidly approaching a doubling of the bank's 2 percent objective, with headline inflation coming in at 6.7 percent y/y vs 6.1 percent forecast by markets. In the face of rising prices and the Bank of Canada's rate hikes, retail sales statistics for February and preliminary estimates for March revealed a robust Canadian consumer.

Could a 75bps hike be in the cards for the BoC?

  • When asked about the likelihood of rate hikes higher than 50 basis points, Gov Macklem told reporters that he will not "rule anything out," and that the Bank of Canada is "prepared to be as aggressive as necessary." This week, Macklem and Rogers will speak before Parliament, with the intention of refining the bank's message about what to expect at future meetings. Although the chances of a 75bps hike at one of the June or July BoC meetings have increased, the CAD has continued to suffer from a significant push in favor of the US dollar due to rising Fed hike bets. Markets are presently pricing in a 50% likelihood of a 75bps hike by the Bank of Canada in June, albeit with 175bps hikes priced in by September, only a single 75bps boost is expected.
  • Powell's remarks in the United States bolstered expectations for a 50-basis point rate hike in May. The USD climbed to a new cycle high against the G10 FX on Friday, aided by an extremely negative risk attitude. The present trend suggests the USD may test even higher levels. The CAD was hit by a 5% reduction in crude oil prices, in addition to the general shift in favor of the USD.

The week ahead:

  • The primary items to watch on the Canadian events and data calendar this week will be Macklem and Rogers' appearance in the Canadian Parliament, as well as the release of February (and preliminary March) GDP figures on Friday. Following last week's tumultuous trading, the Fed's communications blackout ahead of its rate announcement on May 4 could result in calmer markets, which could support a reversal of losses versus the USD.
  • This week’s USD/CAD trading range: 1.2550-1.2850.

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