USD/CAD is at the lows of the day and has fallen into a nice gap on the daily chart. It's currently trading at the lowest since June 9 and there's little in the way of support below.
The Canadian dollar is strong today but it's trailing both AUD and NZD by a wide stretch and it was an even-wider gap yesterday.
That divergence is three-fold:
1) Oil prices are still well-below recent highs and Canada is torqued to crude. WTI is making some headway today and natural gas remains sky high so terms of trade are strong but for the loonie to go into overdrive, it will need some help from oil.
2) CAD has been an outperformer all year. There's some normalization ongoing but CAD is back to neck-and-neck with USD as the top performer of 2022.
3) Central bank convergence. The loonie has benefited from a very-aggressive Bank of Canada. With US inflation peaking, the same is likely in Canada. The market is pricing in a lower terminal top in both the US and Canada. That narrows the gap to the rest of the world, including Australia and New Zealand.
What's worrisome for Canada is the deep inversion of the yield curve and the housing market. 2s10s are 48 basis points inverted, which is 11 bps more than the US curve. Canadian house prices are also clearly falling.and that's a risk I've flagged for months and wil continue to be. So far, however, there are no signs of second-order effects in terms of credit, banking or even spending so while the risks remain, I'm a bit more optimistic than before.
The next Bank of Canada meeting is Sept 7 and the market is pricing in 54 bps of hiking or fully pricing 50 bps with a 16% chance of 75 bps. That would take rates to 3% and add to the worrisome curve inversion.
