It’s been a good week for the Loonie. In fact, it’s the best performing of the major currencies since Monday. But at the start of next week is the release of key data, which leaves traders wondering whether the upside might continue.
Before answering that question, we have to look at why the CAD is outperforming now. The rise in the Loonie can be attributed for a decoupling in economic indicators from the greenback. At the same time, there is also a re-aligment in the outlook between the BOC and the Fed. Both of those are positive for the Canadian dollar, but to keep the currency pair trending the same direction, it would need to be supported by next week’s data.
Canadian Summer Vibes
The latest labour data saw US and Canadian jobs markets diverging, at least in terms of direction. US Non Farm Payrolls disappointed as the economy lost jobs, though the unemployment rate held steady. Canada, by contrast, added 75.1K jobs in the same period, well above market consensus. The unemployment rate fell to a two-year low of 6.4%, signalling strong domestic economic momentum.
The impact was a dissimilar because Canada and the US are in different positions economically. Canada is facing high unemployment, and the data are signs of improvement on a generally bad position. By contrast, the US has near structural employment, despite a low participation rate. This means that the economic situation in Canada is approaching the US, even though the data trends are in opposite directions. This means the data is pushing the exchange rate in the direction of parity, though obviously very far away from reaching it.
The “Convergence” of the BOC and Fed
After an exensive easing cycle in the middle of a trade war with the US, the BOC has kept rates unchanged for several months, and is widely expected to keep rates at current levels for the foreseeable future. The Fed, until recently, was expected to hike rates as soon as September. That would widen the interest rate gap between the currencies, leaving the Loonie under pressure
But the softer US data left the Fed more likely to hold at the next meeting, bringing it more in line with expectations for the BOC. If the interest rate gap is more likely to stay the same, then the downward pressure on the Loonie easies. This allows the CAD to rise thanks to external factors.
Foreign Support for the CAD
Higher crude prices naturally support the Loonie, given its the country’s largest export. The vast majority is sent south, and priced in WTI, which has been narrowing its gap against Brent in recent days. US distillate supplies have been under pressure, particularly now as many Americans buy heating oil in anticipation of the winter.
Ongoing trade negotiations with the US have had a positive tone. This raises hopes that threatened auto and general tariffs can be avoided.
This could ease broader economic uncertainty. It may also support higher exports to the US if a deal is reached.
On Monday, Canadian CPI is expected to ease to 2.6% from 2.8%. Core CPI is projected to fall to 2.0% from 2.1%, near the midpoint of the BoC’s target range.
