​VBCE Weekly Foreign Exchange Wrap Up for Oct. 3 – Oct. 7, 2016

Steve Brown, Senior Corporate Trader | Stevebrown@vbce.ca

It was a very illogical week for the CAD. After closing last week on a positive note helped by strong oil and GDP data (USDCAD fell from a 1.3280 high to close the week at 1.3125), the CAD lost ground vs. the USD this week. USDCAD climbed from 1.3067 (Tuesday's low) to a 7 month high of 1.3314 on Friday. Positive market sentiment, higher energy prices, and solid economic data theoretically should have driven the CAD higher this week after another 6% jump in oil prices, a narrowing of the trade deficit, and the strongest month in 4 years for Canadian employment gains. The USD enjoyed broad strength this week despite jobs data missing estimates and lowered growth forecasts. The USD was the best performing currency this week while the GBP was the worst performing currency on economic fears relating to a "hard Brexit".

Themes for the week:

*USD broadly stronger despite mixed data and downward growth revisions

*CAD broadly weaker despite positive data and higher oil prices

*Canadian trade deficit narrows to $1.94 billion (exp. $2.60 billion / prev. $2.19 billion)

*Another crude oil inventory draw - surprise draws of 26.13 million barrels of crude oil from inventories over the past 5 weeks vs. expectations of a build of 12.93 million barrels

*Oil prices (WTI) gain another 6% to $50.72 – highest level since June

*GBPCAD plunges 9 cents in 3 minutes to 3 year low – worst performing currency on "Hard Brexit" fears

*IMF slashes U.S. 2016 growth from 2.2% to 1.6%

*Atlanta Fed revises U.S. growth from 2.2% down to 2.1% (was 3.6% in Aug)

*Canada adds 67,200 jobs (best month in 4 years – exp. 10,000 / prev. 26,200)

*U.S. adds 156,000 jobs (exp. 175,000 / prev. 167,000)

*U.S. Fed funds probability for Dec. rate hike climbs from 55.1% to 64.0% after jobs data

On Tap for Next week:

Wednesday, Oct. 12: U.S. Fed meeting minutes

Thursday, Oct. 13: EIA crude oil inventories

Friday, Oct. 14: U.S. core retail sales: (exp. 0.4% / prev. -0.1%)

U.S. core producer price index m/m: (exp. 0.1% / prev. 0.1%)

USDCAD closed the week near a 7 month high. Last week's high of 1.3280 was breached on Friday while the positive reaction to the Canadian jobs data sending USDCAD down to 1.3186 was short-lived. USDCAD tested the 1.3314 level and ends the week just below it. The market will now shift focus to Wednesday's release of the minutes from the last U.S. Fed meeting. The probability of a December rate hike now sits at 64%. Will the CAD continue to weaken or will fundamentals come back into play forcing the CAD higher? Further volatility / choppiness for USDCAD is expected.

Topside targets to consider: 1.3300, 1.3350, 1.3400, 1.3500

Downside targets to consider: 1.3186, 1.3067, 1.3000, 1.2950

Sources: Reuters, Bloomberg, FXStreet, RBC Capital Markets, Bank of Canada, U.S. Federal Reserve, CNBC, Forexlive, CMEGroup