Weekly FX – Expectations of a later rate hike hurt CAD

by: Georgette Boele

Lower oil prices, weaker than expected data releases and continued concerns of the impact of a slower US economy on Canada’s exports continued to weigh on the CAD last week. The trade deficit in August widened for the second consecutive month. Recently, the Bank of Canada’s Senior Deputy Governor Macklem said that economic recovery led by export growth remains elusive. The trade data confirm his view. As a result, the market has gradually pared back expectations of rate hike in late 2014. This has hurt the overall outlook of the CAD. The widening of the yield spread between the US and Canada has supported USD/CAD. This week, we expect inflation in September to remain at the lower end of the central bank’s 1-3% target. We continue to expect the CAD to underperform the USD towards 1.06 in the coming months as interest rate differentials between the US and Canada are likely to widen.

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