USD/CAD falls to the lows of the week as oil prices continue rebound

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Today’s Canadian GDP data and federal budget stats highlighted an economy that was on a solid footing in Q4 and some of the tailwinds from oil prices. The numbers helped to cap USD/CAD at 1.3700 this week and after several attempts at that level failed, the pair has sagged down to 1.3563, which is the lowest since Dec 14.

My main worry heading into 2023 is housing. The Canadian market is extremely vulnerable to higher rates as more resets kick in and consumers begin to feel the pinch.

Many borrowers are holding on and hoping that rates reverse but over time that pain could mount, particularly if the Bank of Canada hikes again on January 25. If that happens, I expect a counter-intuitive market reaction and CAD selling on economic risks. In the lead-up to that decision, strong data and high inflation numbers could for the BOC’s hand.

On the other side, China’s reopening will eventually offer some tailwinds. Chinese officials are already highlighting the high proportion of people who have contracted covid and even though there are short-term risks, the economy may reopenen and roar faster than anticipated. That could add tailwinds to oil, especially if the 700k bpd production cut from Russia materializes.

In terms of technicals, I would be careful over the next week as year-end flows dominate. Early in January, we will get another test of 1.3700 or a break below the mid-Dec low of 1.3518 and I would go with either. But the loonie has been hit several times in the past decade with overshoots before the turn of the year so be careful.

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