The loonie is surging against the greenback. This increase has come on the heels of the blowout employment report from Canada underscoring just how weak the labor market is here in the US. On Friday, Canadian statistics revealed another strong headline beat, showcasing a significant drop in the unemployment rate and elevated wage gains. That optimism has a lot of analysts making rosy predictions, perhaps too rosy. They forecast the biggest downside for the US dollar, as far out as the mid-1.37s.
More recently, the USD/CAD pair has some great resistance levels to watch at 1.3975 and 1.4025. Spot losses have now eclipsed the measure of the 1.4140 double top formed in November. This dramatic shift may be a harbinger of what market dynamics are to come. The next key 61.8% retracement level is at 1.3766. At the same time, a stack of lows from August and September sit between 1.3750 and 1.3755.
With the recent drop of the USD, it has shattered this bullish trend that was formed since the middle of the year. The chief analysts and strategists at Scotiabank, Shaun Osborne and Eric Theoret, are betting that there will be 100 basis points’ worth of Federal Reserve rate cuts within the next year. At the same time, they expect the Bank of Canada to up the ante with 50 basis points increases in its monetary policy over the same period. The yield curve inversion is reversing from today’s 175 basis point spread to a forecasted 25 basis point inversion. This structural shift will continue to impact currency valuations.
“Markets have moved quickly to price in the start of the BoC tightening cycle late next year compressing spreads and boosting the CAD. If Scotia’s rate calls are correct (100bps of cuts from the Fed and 50bps of BoC tightening over the next 12 months, narrowing the policy spread from 175bps currently to 25bps), market-driven spreads have more work to do.” – Shaun Osborne and Eric Theoret
While things might look good on the surface with Canada’s employment data, Osborne and Theoret warn that it isn’t all rainbows and butterflies.
“The news was not entirely positive; jobs gains were marked by quantity rather than quality and while hours worked picked up in the month, the trend remains soft, suggesting sluggish growth momentum.” – Shaun Osborne and Eric Theoret