USD/CAD Fundamental Analysis – week of September 5, 2016

The USD/CAD ended the week at 1.2988 just about even for the week but remains a buy moving into the short holiday week with both the US and Canada shuttered on Monday for domestic holidays. Friday’s US jobs data which disappointed vied against the Canadian trade report which came in better than forecast but the dip in oil prices and the slight rise in gold kept the Loonie on an even level.

The Loonie fell sharply through early August but the sell-off has since steadied and the USD is showing signs of modest strength again. Spot moves are more strongly correlated with short-term rate spreads than commodity prices currently, suggesting firmer US data and more confidence in the Fed policy outlook will be needed to support an extension of the USD rebound in the next few weeks. We remain bullish on USDCAD and continue to feel that corporate USDCAD buyers should consider hedging USD payable while USDCAD sellers should wait to hedge receivables.

Speculators should cover USD short/long CAD positions. Canadian institutional investors should consider staying neutral or moving to overweight USD relative to benchmarks. The annual Fed gathering at Jackson Hole last week bolstered market expectations that the Fed is inching closer to tightening interest rate policy a notch or two in the coming months. The Fed remains “data dependent”, however, and will need to see the recent strong run of US data reports extend before pulling the rate trigger. But, with both the NY and Atlanta Fed’s GDP “now casting” models suggesting the US economy is growing at a decent clip (latest tracking suggests 2.8% and 3.5% rates of growth for Q3 respectively) and the Fed’s employment goals all but attained, modestly tighter policy is looming, it would seem. Note that markets have not yet fully priced in the risk of one 25bps Fed rate tightening over the next 12 months.

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This Week’s Economic Events That You Should Be Monitoring:

 Government Bond Auctions

Date Time       Country           Auction

Sep 06 11:00 Austria Holds bond auction

Sep 06 11:30 UK 1.5% 2026 Gilt

Sep 06 11:30 Germany Holds I/L bond auction

Sep 07 10:30 Denmark Holds bond auction

Sep 07 11:03 Sweden Holds bond auction

Sep 07 11:30 Germany Eur 5bn 0% Aug 2026 Bund

Sep 08 11:00 Ireland Holds bond auction

Sep 08 17:20 Italy Announces details of bond auction