It appeared as if a combination of short-term profit taking and ‘risk on’ weighed on USD demand this morning, as key sovereign rate differentials have not materially backed off against the USD yet. We still have important US data to get through over the coming few weeks, and the outcome of that data will be a crucial factor in determining whether the firmer tones in yields and the USD can extend themselves. The most immediate risk to be mindful of, however, is today’s Fed speak. 1.385 and 1.655 in EURUSD and GBUSD respectively will come into play quickly if these remarks seek to offset some of the impact of the FOMC on Wednesday.
Our economists are looking for a stronger-than-consensus read on ex-auto retail sales (1.1%) and an in-line reading on headline CPI (1.0%). The combination of Poloz on Tuesday and the FOMC on Wednesday probably have the short-term CAD market biased moderately net short heading into the data.
USDCAD shouldn’t be too vulnerable to a sharp correction lower on in-line or slightly firmer data, however, mainly because the 5yr swap rate differential has driven the CAD in this latest move, and not the other way around. On that metric, we’re not too far off short-term fair value at this point, so 1.119-1.122 should provide good support. However, what will compound an in-line or better result in the data is ‘dovish’ Fed speak, and that could set us up for a weekly close in the 1.115-1.120 range. Our hunch is that the consensus is looking for today’s Fed speak to ‘soothe’ some of the fears instigated by Wednesday’s FOMC, so we’d be cautious about buying USDCAD 1.120-1.125 if the data are on the better side.
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