After last week's surprising CPI developments, it appears that we are now leaning towards the idea that there might be an increased likelihood of another BoC hike in October, with market expectations shifting significantly (from a mere 30% prior to now exceeding 50%). However, I believe it's important to keep a watchful eye on this week's GDP data, which I anticipate could potentially temper these expectations. Friday will bring us July GDP figures (with consensus at 0.1% and my outlook slightly more conservative at 0.0%), along with initial Statscan insights into August.

My perspective aligns with RBC's forecast of a -0.5% Q3 projection. While employment and hours worked did rebound in August, it's worth noting that housing markets have been displaying signs of cooling, and consumer spending on non-essential items continues to show sluggishness. Additionally, this week, we will receive Q2 CA population estimates, a closely monitored metric given the robust y/y increase seen in Q1, which was the most substantial growth since the 1950s. While population growth can be seen as a positive factor for economic expansion and the housing sector, it's essential to remember that, within the BoC's framework, it can also introduce dynamics that affect the labor market and supply side.

Reflecting on my CAD framework, it suggests a negative residual of 0.7% last week, indicating that USD/CAD may have weakened more than anticipated by usual drivers. I see potential for this to correct in the coming week, especially with the current downward trend in USD/CAD showing signs of fatigue and the supporting trendline, originating from the July lows, remaining intact. Any further softness in the equity market would be a contributing factor.

It's noteworthy that substantial buying pressure of US equity futures by asset managers in the previous week, with USD23 billion in new long positions. These positions are already showing signs of vulnerability to potential liquidation.

In sum, I would recommend keeping a cautious and observant stance, particularly in light of the evolving economic landscape and its potential impact on the markets.

LONG ON USDCAD

Sep 27 2023

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