According to Barclays, the recent inflation report from the Bank of Canada (BoC) gave a mixed picture, leading them to believe that the BoC may not be satisfied with its current pause. Despite a stronger headline and a softening core, the Bank sees continuous potential for the strength of the Canadian Dollar (CAD) due to market expectations and oil prices.
However, the recent strength in US data, such as jobless claims, introduces upward risks to the US terminal rate, implying potential impacts on the CAD. The lack of significant domestic data this week suggests that Canadian assets will likely be influenced by the macroeconomic backdrop and any resolution to the ongoing US debt ceiling issue.
If a resolution involves large fiscal concessions, this could negatively affect the CAD. This is not only due to the possible souring of risk sentiment, but also because of Canada’s close economic ties with the US. The nature of the agreement on the debt ceiling issue is therefore of significant interest for CAD forecasters.