USD/CAD to find solid support at the 1.25 level – TDS

Economists at TD Securities think Canada's economic recovery slowed as the pandemic's third wave took hold, but they do not expect a significant reaction in USD/CAD. Instead, they think the loonie will remain more sensitive to overall risk sentiment and US fixed income performance.

Canadian GDP is unlikely to drive price action in the CAD

“We look for Q2 GDP slightly above BoC forecasts at 2.6% as the 3rd wave of COVID-19 weighs on the recovery. However, Q2 should end on a decent note with a 0.6% increase for June, slightly below StatCan estimates and consistent with a mixed picture from labour market data. New flash estimates will also garner attention after a downbeat read on manufacturing and retail trade for July.”

“We think the CAD will remain more sensitive to overall risk sentiment and US fixed income performance (particularly 10y breakevens). We do not expect this to change ahead of the US payrolls reading slated for this week. We also do not think this data will do much for BOC pricing, which has been pretty stable for sometime.”

“For USD/CAD, variation will mostly come from the USD-leg, given Powell's less cavalier attitude to tapering (compared to his colleagues) puts near-term emphasis on US data to inform taper's initiation date.” 

“Our expectations for a below-consensus NFP print has us expecting modest USD downside, but we expect USD/CAD to find support into 1.25.”