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 trading at three year lows thanks to rising global risk appetite, strong growth outside the United States and a sharp run-up in the Japanese yen. As global equity markets rebound, safe haven flows into the US dollar are reversing. Looking at growth, current and forward-looking indicators suggest that growth in the Eurozone is on track to keep accelerating. While recent Japanese GDP growth was fairly disappointing, the yen strengthened following the announcement due to its safe haven characteristics. As USD/JPY is traded in significant volumes, a strengthening yen tends to weaken the US dollar in relative terms. Turning to US data, the US dollar has been fairly immune to positive economic data and rising US Treasury bond yields. Thanks to solid jobs and inflation figures, US Treasury yields are rising as the market bets on a faster pace of rate hikes. While the buck typically benefits from higher relative interest rates, this isn't the case today as markets expect monetary policy to tighten around the world. Later today, we will downgrade our short-term outlook to bearish, while our medium-term outlook remains bearish.
USD/JPY is down sharply today and currently trading above 105.70. EUR/USD is up and trading above 1.2540. The pound is up, and GBP/USD is currently above 1.4140.
Looking at US economic data this week, markets will be focused on retail sales and consumer price index figures. The monthly budget was worse than expectations. The YoY Consumer Price Index beat estimates (2.1% vs. 1.9% expected). MoM retail sales (ex-autos) were lower than estimates (0% vs. 0.4% expected). Initial jobless claims (230k) and the NAHB housing market index (72) met expectations. The Philly Fed manufacturing survey (25.8 vs. 21.1 expected) was ahead of expectations. MoM industrial production (-0.1% vs. 0.2% expected) and capacity utilization (77.5% vs. 78% expected) were slightly below consensus estimates. Later today, we’ll get housing starts and building permits. Last week, strong PMI numbers suggested a positive outlook for US growth.
The Canadian dollar is weakening today, as the global stock market rebound runs out of steam. In general, riskier assets such as stocks and commodities are doing poorly today, which is driving down the Canadian dollar. CAD is currently selling off against safe haven currencies such as the US dollar and the Japanese yen. The loonie is flat against the euro and the British pound. The US dollar is strengthening today, alongside most global government bonds. Safe haven assets such as the US dollar and government bonds typically rally when risk sentiment is weak. Turning to NAFTA discussions, top US and Mexican officials are cautiously optimistic that NAFTA can be renegotiated. The seventh round of negotiations will take place in Mexico City starting on February 25. As Mexican presidential elections are set to take place in July, there is a likelihood that talks will have to be postponed until later this year. Our short-term outlook on the Canadian dollar is neutral, while our medium-term outlook remains bullish.
The USD/CAD exchange rate is currently above 1.2540. The euro is flat against the Canadian dollar, with EUR/CAD currently above 1.5590. The pound is also flat against the Canadian dollar, with GBP/CAD trading above 1.7570.
This is a very light week for economic data from Canada. Manufacturing sales figures missed expectations by a significant degree (-0.3% vs. 0.2% expected). Last week, trade balances and changes in employment were below expectations.
As the pair gains strength, we are now neutral on USD/CAD. Note that USD/CAD is currently trading within a normal range in the short-term. This is based on technical indicators on a daily chart.
As the Canadian dollar strengthens, we are now bearish on USD/CAD. The pair is trading under normal conditions. This is based on technical indicators on a weekly chart.
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