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GLOBAL FX STRATEGY | WEEKLY FX OUTLOOK
October 18, 2019
CAD Weekly Outlook
CAD Firms and Has More Room to Progress
The CAD has picked up a little more obvious support this week and is one of the
G-10’s better-performing currencies since the start of trade Monday. Aug
Manufacturing Sales bettered estimates and helps underpin Q3 GDP tracking
nearer 2% than the 1.5% forecast in the BoC’s last MPR. CPI was a little softer
than expected in Sep but inflation overall was also likely a little above where the
BoC estimated it would be in Q3 (1.6%, according to the July MPR). While the
US/Canada data surprise spread has not moved materially this week, we think
the key data points – US manufacturing output falling at its fastest rate since
2016 – suggests that the industrial sector slowdown is biting a bit harder in the US than Canada at this point. In addition, the
broader decline in the USD, reflecting weaker safe haven demand amid signs of progress on US/China trade and Brexit is helping
drive USDCAD lower; hopes for progress on USMCA in the next month or so may also be underpinning improving CAD sentiment,
as reflected in the sharp decline in USDCAD risk reversal pricing.
Regardless of domestic developments – the Federal election – it seems pretty clear that the initial tone at least for trading next
week will be set by the outcome of the UK parliament’s Brexit vote. Broader market uncertainty has relaxed a little in the past
couple of weeks amid signs of progress on US/China trade frictions and hopes that the UK can finally settle its Brexit course. This
has undercut the USD but still leaves USDCAD somewhat overvalued; our high frequency FV model (whose inputs we tuned to
reflect the CAD correlation matrix below) suggests equilibrium for USDCAD of 1.2805 currently. On the election, most polling
suggests the Liberals and Conservatives are neck and neck while the Liberals stand the best chance of obtaining most seats, but
not a majority. We do not expect this outcome to have a significant impact on the CAD, at least initially. Indeed, over the longer
run, the CAD’s longer-term direction seems to have rarely been affected by Federal elections. Voting in 2008 and 2011 did
coincide with major turning points in the USD but this reflected external developments (the financial crisis and its aftermath) rather
the domestic politics, we suggest.
Next week’s calendar highlights:-
Shaun Osborne
Chief FX Strategist
416.945.4538
Eric Theoret, CFA, CMT
Juan Manuel Herrera
FX Strategist
416.866.6781
FOLLOW US ON TWITTER @SCOTIABANKFX
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GLOBAL FX STRATEGY | WEEKLY FX OUTLOOK
October 18, 2019
o The US calendar is relatively light next week but there is a little more data on Oct activity (Richmond Fed Manufacturing
Index Tuesday and the preliminary Markit Services and Composite PMI data as well as the Kansas City Fed
Manufacturing Index Thursday). Durable Goods data are released Thursday also; preliminary forecasts reflect
expectations for a 0.8% M/M decline in orders and a small drop in core capital goods orders in Sep.
o Canadian data releases next week are last data points ahead of the BoC policy decision on Oct 31. Aug Retail Sales are
released on Tuesday, just ahead of the BoC’s Senior Loan Officer Survey and Business Outlook Survey, while Wholesale
Trade data for Aug are out on Wednesday. The relative condition of growth and inflation (both running a bit ahed of BoC
expectations for Q3) as well as anecdotal evidence contained in the Business Outlook Survey will do much to inform
policy makers’ thoughts on appropriate monetary policy settings. We, along with most, expect the Overnight Target rate
to remain unchanged at end of the month.
USDCAD’s technical backdrop remains bearish. The USD slide halted –more or less precisely – at noted support near 1.3135 this
week but a second net weekly loss for the USD “confirms” last week’s bearish “engulfing line” reversal signal while trend oscillators
are aligning bearishly for the USD on the short, medium and (just about) longer term studies. The alignment on the DMIs implies
limited scope for counter-trend, corrections in the USD and increasing downside pressure on spot. We look for a break under
1.3135 support to trigger 200-210bps of additional downside movement in USDCAD by way of a (rough) double top signal on the
charts following the USD’s stalled upside moves through the mid-1.33s since August.
NEXT WEEK'S NORTH AMERICAN CALENDAR
Day Country Release Period Consensus Last
Tue MX Unemployment Rate NSA Sep -- 3.74%
CA Retail Sales MoM Aug -- 0.4%
CA Retail Sales Ex Auto MoM Aug -- -0.1%
US Richmond Fed Manufact. Index Oct -- -9
MX International Reserves Weekly 18-Oct -- $180324m
US Existing Home Sales Sep 5.45m 5.49m
CA BoC Senior Loan Officer Survey 3Q -- -5.8
CA BoC Overall Business Outlook Survey 3Q -- 0.2
CA BoC Business Outlook Future Sales 3Q -- 23
Wed CA Wholesale Trade Sales MoM Aug -- 1.7%
US FHFA House Price Index MoM Aug -- 0.4%
Thur MX Economic Activity IGAE YoY Aug -- 0.3%
MX Bi-Weekly CPI 15-Oct -- 0.1%
MX Bi-Weekly CPI YoY 15-Oct -- 3.0%
US Durable Goods Orders Sep P -0.8% 0.2%
US Durables Ex Transportation Sep P -0.3% 0.5%
US Initial Jobless Claims 19-Oct -- 214k
US Markit US Services PMI Oct P -- 50.9
US Markit US Composite PMI Oct P -- 51
US New Home Sales Sep 699k 713k
US Kansas City Fed Manf. Activity Oct -- -2
Fri MX Retail Sales YoY Aug -- 2.10%
US U. of Mich. Sentiment Oct F -- 96
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GLOBAL FX STRATEGY | WEEKLY FX OUTLOOK
October 18, 2019
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