BMO Economics Notes the Canadian Dollar "Remains Squarely on the Defensive" Vs a "Steamroling" USD

10/07/2022 | 04:00pm
(MT Newswires) -- The Canadian dollar "remains squarely on the defensive" in the face of a "steamrolling" U.S. dollar, noted Douglas Porter, Chief Economist at BMO Economics, in his latest 'Talking Points' note this Friday.

Porter noted the loonie managed to firm slightly this week to 73 cents ($1.370/US$), but this followed a seven-week string of declines (based on the weekly average). He said the "powerful" 15% rally in crude provided almost no lift to the currency, and ditto for a "relatively hawkish" speech by Governor Macklem on Thursday. And an as-expected September jobs report was a "mild relief", with the 21,100 gain snapping a three-month losing streak and the jobless rate dipping to 5.2%. "But the details were generally sluggish," Porter added, "and we continue to lean to a more moderate 50 bp BoC hike later this month -- though the upcoming CPI and Business Outlook Survey still need to weigh in."

Porter noted the emerging view that the Bank of Canada will ultimately hike less than the Fed has "submarined the loonie" in recent weeks. The currency had been largely holding its own up until a month ago, even testing longstanding highs on a variety of the cross rates. But the "surprisingly mild" August CPI and the "previously soggy summer jobs data" reinforced the view that the BoC will not need to tighten much further. And record-high household debt levels suggest that Canadian consumers may buckle earlier than their U.S. counterparts. Also, the preliminary home sales data from major cities point to a 32% y/y drop nationally, which would imply another big step back in monthly terms, with further downward pressure on prices. Porter recalled that housing carries more than double the weight in Canadian real GDP (7.1%) versus the U.S. (3.4%), so the retreat in that sector will weigh more heavily on Canada.

Meantime, Porter noted, expectations for further Fed tightening are "grinding" higher again after markets had earlier shaved the most aggressive views. Two-year yields were approaching 15-year highs above 4.3% (roughly 25 bps north of Canadian 2s). Porter noted the "hawkish rhetoric was relentless" from almost one and all Fed speakers, including some "incredibly specific" remarks by Cleveland President Mester ("no cuts in 2023") and Governor Waller ("I anticipate additional rate hikes into early next year").

Looking ahead, Porter said, "data will speak louder than words", and next Thursday's September CPI looms largest in the US. Another month of lower pump prices is expected to trim the annual headline rate modestly (albeit holding above 8%). But -- as was the case a month ago -- "beware the core", said Porter. He noted BMO is, as usual, above consensus in looking for a "meaty" 0.5% m/m underlying rise, which would pump up the annual core rate to a cycle high of 6.6%. "Suffice it to say, markets and the Fed would not greet that result with open arms," he added.

MT Newswires 2022
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