USD/CAD, or US dollar to Canadian dollar, is a major currency pair and is heavily traded in foreign exchange markets. Given that crude oil and refined petroleum products make up a significant portion of Canadian exports, USD/CAD tends to track global commodity prices. Similar to other commodity currency pairs, USD/CAD tends to depreciate during economic booms (CAD appreciates) while strengthening (CAD depreciates) during downturns. Looking at recent history, USD/CAD appreciated significantly during the 2008 financial crisis and following an emerging markets downturn in 2016.
The US dollar is currently slightly lower against all major currencies except the Japanese yen. Yesterday, the buck moved up sharply for the second session in a row. Beyond the move higher, note that trading volumes in US dollar index futures accelerated compared to the previous session and relative to 30-day averages. This is a sign that traders bought the dollar with conviction. Today's US dollar index trading range is 94.30 - 96.60.
Following a significant move higher in the last two sessions, the buck is currently taking a breather. As risk sentiment continues to deteriorate, the dollar appears to have found buyers seeking safety. Yesterday, US equity markets resumed weakening, with the S&P 500 ending the day down by more than 1%. Growth-oriented indices, such as the NASDAQ Composite, fared even worse as the US growth outlook darkens. In currency markets, the euro was particularly weak against safe haven peers such as the yen and the Swiss franc. All else held equal, the dollar tends to strengthen in relative terms when 'risk on' currencies sell off.
Turning to the latest news, yesterday's Federal Reserve speakers suggested that the pace of future rates hikes may need to be re-assessed. Federal Reserve Vice Chairman Quarles called for a more gradual pace of rate hikes, suggesting that the Fed should deliver about one hike per quarter. "Absolutely, my path for policy is more gradual" than most other policymakers, he said. St. Louis President James Bullard also noted that continued rate hikes may result in a recession. Specifically, he suggested that the Fed may have to change course if tax cut-fueled growth begins fading in the near future. Following the significant equity market sell-off this month and thanks to recent weakness in economic data (e.g. September retail sales), the Federal Reserve is less likely to continue signaling tighter monetary policy.
While the dollar has benefited from the relative outperformance of the US economy over the past few quarters, the buck is likely to continue strengthening as US growth begins slowing in rate-of-change terms. As a safe haven currency, the dollar tends to the strengthen the most in response to slowing growth. Our outlook on the dollar remains bullish.
|October 15||NY Empire State Manufacturing Index OCT||21.10||19|
|October 15||Retail Sales YoY SEP||4.7%||6.5%|
|October 15||Business Inventories MoM AUG||0.5%||0.7%|
|October 15||Monthly Budget Statement SEP||$119B||$-214B|
|October 16||Industrial Production YoY SEP||5.1%||4.9%|
|October 16||JOLTs Job Openings AUG||7.136M||7.077M|
|October 16||NAHB Housing Market Index OCT||68||67|
|October 17||Building Permits SEP||1.241M||1.249M|
|October 17||Housing Starts SEP||1.201M||1.268M|
|October 17||Fed Brainard Speech|
|October 17||FOMC Minutes|
|October 18||Initial Jobless Claims 13/OCT||210K||215K|
|October 18||Philadelphia Fed Manufacturing Index OCT||22.2||22.9|
|October 18||Fed Bullard Speech|
|October 18||Fed Quarles Speech|
|October 19||Fed Kaplan Speech|
|October 19||Existing Home Sales SEP||5.34M|
|October 19||Fed Bostic Speech|
The Canadian dollar is currently selling off against all major currencies except the Japanese yen. Yesterday, the loonie ended the day sharply lower against the US dollar. For the third session in a row, trading volumes in Canadian dollar futures accelerated relative to the previous session. The combination of recent weakness and rising volumes suggests that traders are selling the loonie with conviction. Today's USD/CAD trading range is 1.2770 - 1.3120.
Following a significant slowdown in year-over-year inflation, the Canadian dollar sold off sharply earlier today. Looking at the figures, headline inflation in September slowed to 2.2%, versus 2.8% in August. Consensus estimates had also called for significantly higher inflation in September. Ahead of next week's Bank of Canada interest rate decision, the significant slowdown in inflation (from its recent peak at 3% two months ago) is a serious concern for Canadian dollar traders. Beyond the recent slowdown, inflation is likely to keep slowing thanks to steepening base effects. In other words, rising inflation at this point last year makes a continued acceleration in year-over-year inflation mathematically more challenging. All else held equal, falling inflation lowers rate hike expectations, in turn weighing on the Canadian dollar.
While September retail sales figures (also announced earlier today) beat the previous monthly figures, note that August retail sales numbers were revised lower. As consumption is a significant proportion of Canada's overall economy, retail sales have a significant impact on the outlook for growth. As retail sales growth has been decelerating in rate-of-change terms this year, it follows that the outlook for Canadian growth is weakening accordingly. Our outlook on the Canadian dollar remains bearish.
The USD/CAD exchange rate is currently above 1.3110. The euro is up against the Canadian dollar, with EUR/CAD currently above 1.510. The pound is up against the Canadian dollar, with GBP/CAD trading above 1.710. CAD/JPY is flat, and currently trading above 85.70.
|October 15||New Motor Vehicle Sales AUG||185.2K||179.6K|
|October 15||BoC Business Outlook Survey|
|October 16||Foreign Securities Purchases AUG||C$2.82B||C$15.29B|
|October 16||Foreign Securities Purchases by Canadians AUG||C$-0.19B||C$13.06B|
|October 17||Manufacturing Sales MoM AUG||-0.4%||0.9%|
|October 18||ADP Employment Change SEP||28.8K||42.7K|
|October 19||Core Inflation Rate YoY SEP||1.5%||1.7%|
|October 19||Inflation Rate YoY SEP||2.2%||2.8%|
|October 19||Retail Sales YoY AUG||3.6%||3.5%|
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