In trying to understand the direction of USD, one has to understand the Fed and the figures it is looking at. The team at CIBC examines another angle of jobs. And for the Canadian dollar, another interesting phenomenon is happening.
Here are the views of CIBC for the week:
Here is their view, courtesy of eFXnews:
The following are the weekly outlooks for the USD, and CAD as provided by CIBC World Markets.
USD: A Narrower Focus at the Fed? For all the talk of keeping an eye on a wide range of economic indicators, it appears that the Fed may again be putting more weight on an old friend—payrolls. One interesting point within last week’s FOMC statement was that the word “gradually†was dropped from the definition of diminishing labour market slack. That’s interesting because, if the Fed’s broad indicator of labour market conditions is anything to go by, the improvement is actually slowing. Policymakers appear to have concluded that the LMC is obviously at odds with the strong 321K gain in payrolls during November, and are again putting more weight on that.
Further strong payroll gains will have the Fed start hiking in April—something which has yet to be fully priced into FX or Treasury market.
CAD: Futures Not Sold On Crude Recovery. Because lower crude prices are a net positive for the US and a net negative here in Canada, the gap between the Fed and the BoC is now likely wider. But if oil tracks the trajectory traced out in current futures pricing, a single Q4 hike from Poloz will likely be off the table entirely. The Bank’s past research suggests that a 40% drop in oil would dent the currency by around 5%. Without the recovery in prices that we’re assuming, even more pressure would mount on the loonie.
With no Q4 rate hike by Poloz, and an even weaker trade balance, the C$ would likely be trading beneath 80 cents US heading into 2016.
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