USDCAD: Shift in data surprises favors upside momentum - TDS

Mark McCormick, North American Head of FX Strategy at TDS, suggests that since bottoming out in late April, USDCAD has traded in a fairly consistent range between 1.27 and 1.32.

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“The currency has struggled to break this range given the offsetting impulses of oil prices, US-CA rate spreads, risk appetite and market positioning. The last few sessions have seen USDCAD inch back above 1.30 with stronger US data helping to support a broad rally in the greenback. With USDCAD lagging the shift in the data spread indices, this offers another reason to expect it remain north of 1.30.

For USDCAD, the interaction of these other drivers has left data on the back burner since early Q2.

Over the past 15 months, USDCAD and the spread of data surprises have averaged a correlation of 0.77. The correlation dropped to 0.33 in Q2, and we think the correlation may start to shift again. US data surprises have surged to a near 18-month high. In the past few weeks, the US has seen big upside surprises in employment, retail sales, and production, leading to a surge in the US data surprise index.

Canada, on the other hand, has seen surprises move in the other direction. The Canadian index peaked at the start of Q2. The impact of the wildfires may have led investors to fade the data early on but underlying economic momentum is still weak. By the same token, the latest round of the manufacturing PMIs has captured this shift in momentum.

The shift in data surprises favors upside momentum in USDCAD, especially if data performance becomes more important for policy divergence between the Fed and BoC. Our model implies a move back to 1.32, which urges buying dips near 1.2750.”