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USDCAD Tests 1.3300 Ahead of Dual Jobs Reports at 830am ET

Published October 7, 2016
  • USDCAD spiked higher in early Noram trading, with spot rising 0.5% from yesterday's close before running into selling pressure right at the 1.33 handle
  • A break of 1.33 is likely to trigger a lot of of US dollar buy orders, causing another spike higher as many hedge books are likely short USD above that level
  • The US dollar has seen a broad based rally overnight fueled by the continuing Brexit saga which has severely crippled the allure of the Pound Sterling…
  • …at one point GBP/USD dropped 6% during Asian trade to 1.1491 before recovering late in the session to trade with a 1.24 handle, a more modest 2% fall
  • Seems to have been a “flash crash” – loose terminology for a series of stop loss orders being triggered amid a dearth of liquidity… blame the computers, I suppose
  • The Loonie certainly felt some of the resulting risk-off pinch that followed and is so far ignoring WTI prices that are above $50 for a second day
  • Is the breakdown in correlation between WTI and CAD the canary in the coal mine for the Loonie? 
  • Sentiment surrounding the proposed OPEC production cut seems to be improving but the Canadian dollar has not benefited at all 
  • USDCAD maintains a strong positive correlation with US yields and short term US yields are at their highest since May
  • The Market continues to call the Fed's bluff with only 25bps of tightening priced in by end of 2017…
  • …conversely, the Fed forecasted 200bps in hikes by end of 2017 at their September meeting…
  • …if the market has to catch up to the consensus view at the Fed then USDCAD could really run higher in the medium term
  • So far, the market has been correct in calling out the bluff and today's employment reports will be key to see if this trend can continue
  • Consensus is for the US to add 175k jobs with unemployment steady at 4.9%
  • Canada is looking for a 10k gain with unemployment at 7.0%
  • US numbers will have to be at least +225k, along with unemployment at 4.8% and higher weekly earnings as well, for odds of a December hike to move much higher than the current 57% (Chart 2)
  • There are lots of subsequent data as well this morning (Chart 3) so we could see some more volatility in USDCAD before the day is out

Charts: (1) USDCAD tests key 200 DMA. (2) Fed rate hike odds. (3) Economic Calendar.