The Canadian dollar seems unable to take advantage of the excellent Canadian jobs report nor the rising oil prices. What’s next?
Here is their view, courtesy of eFXnews:
Commodity currencies are stuck in a tug-of-war between firmer oil prices and recalibration of Fed policy. CAD continues to lag the move in oil prices with possibility some scope to play catch-up to the rally. Still, we are cautious about chasing the move too much with the week ahead littered with Fed speeches, Fed minutes and US retail sales. Recall that the tone from Fed speakers has been hawkish, which is likely to add a bit more importance to this week’s release of the September FOMC minutes. The focus will shift to the internal debate that led to three dissents for a hike. Moreover, the pickup in auto sales is expected to give a substantial bump to September retail sales following the swoon in August.
This suggests that USDCAD dips are likely to be brief and shallow with our high-frequency fair value model indicating strong support near 1.31. Given stretched levels, we still prefer fading the rallies near 1.33.
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Cable is down close to 4% since the middle of last week, owing to the talk about a hard Brexit. GBP swings continue to run independently of the data with UK data surprises operating at their best level in nearly three years. Recall that the BoE only to plans to ease again this year if data comes in below their expectations. That seems unlikely before year end given the recent strength of the data. We also note that speculative positioning sits near all-time lows, suggesting that much of the short-term negatives are currently priced into to sterling for now.
We see some potential for a short squeeze but would look to sell into those rallies since economic rebalancing will likely fall on cable’s shoulders. We like buying GBPCAD at these levels and would start to fade the move near 1.704.
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