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Weekly Currency Update

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Volatility continues to plague the CAD

  • The CAD finished the week on the defensive but has remained relatively unchanged in the last five days against a strong USD. With the FOMC delivering the expected 50bps tightening in policy and the Fed chairman managing to sound relatively dovish despite clearly hinting that rates would likely rise another 50bps at each of the June and July FOMCs has left markets very volatile. Mr. Powell indicated that more aggressive hikes (75 basis points) were not on the Fed's agenda, and that his focus on 1/2-point hikes over the next several sessions only indicated that the pace of tightening would moderate later this year. Nonetheless, the post-FOMC environment has been marked by significant market and bond sell-offs.

CAD Weakness likely wont extend much further

  • Volatility and uncertainty tend to favour the dollar in general, but the CAD has one of the strongest, positive correlations with US equities among the major currencies at the present, implying that the CAD's recent performance has been impeded by six consecutive weekly falls. Although fair value models predict potential risks for the CAD, rising commodities and a solid domestic economy could minimize short-term downside pressure. Over the last few months, the top of the range (upper 1.28s/low 1.29s) has been constant, and broader USD gains are starting to appear excessive after the rate-fueled rise higher. Fed tightening risks appear to be fully priced in the market, leaving the USD vulnerable to weakness if markets decrease Fed expectations.

The week ahead

  • The week ahead is very light on the data domestic front, meaning somewhat random external factors – volatility and the broader USD tone will continue to shape CAD trends. In Canada, there is just Building Permits data today. The US releases CPI, PPI and Import Price data over the week. Industrial Production and preliminary May U. Michigan Sentiment data are also featured. There are also numerous Fed speaking engagements (including Mester, Bostic, Williams and Waller on Tuesday).

This week’s currency range: 1.2715 – 1.2920.

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