The Canadian dollar is competing with the kiwi for the top spot in G10 FX today as risk trades surge and the US dollar sinks. USD/CAD is down 106 pips to 1.3747, which is the lowest in a week.
The price action in November so far is a mirror image of October, when the pair hit a one-year high of 1.3892 from 1.3446 on the first day of the month. Now it's testing the minor October trendline and has just edged below it. Beyond that, there is little support until the 55-day moving average at 1.3621 and the large trendline from July.
The next leg in this pair is likely to come from the USD side with non-farm payrolls and the ISM services report due on Friday but the Canadian jobs report is due at the same time. If there's a material divergence in the two reports, expect that to be reflected in the currency. The consensus for the Canadian report is +22.5K from +63.8K previously.
There are clearer signs of a slowdown in the Canadian economy than in the US. A material divergence in the US and Canadian economies is unfolding that’s not yet reflected in the currency. The Canadian economy is far more vulnerable to high rates and in the coming weeks, I suspect the evidence will begin to mount that demand is slowing significantly.
In the first half of 2024, I expect the Bank of Canada to stubbornly hold rates high, setting off a deeper slump in real estate and pain the broader economy. Ultimately, the BOC will realize it’s behind the curve and cut rates significantly in the second half of the year and certainly far more than the 40 basis points implied by the OIS market. As that unfolds, USD/CAD will retest the pandemic highs of 1.45 (or 0.69 cents).
For now though, the market is trading one data point at a time right now and that won’t change through year end. The loonie hit a new low on soft GDP data and it will reflect the ebb and flow of data with a bias lower on a deteriorating economy. The broad US dollar trade is crowded and some of the air has come out of the dollar today but that could continue. Ultimately though, I don’t see any other economy that can compete with the US in a high-rate environment.
