CAD Brief - EM worries spread

China is at the center of broader concerns on Emerging Markets, and that is clearly flowing into developed markets now. Risk-aversion is palpable across markets at the start of the week, and the question for CAD watchers is what the strongest transmission mechanism to the currency is? It is believed that,the main influence on CAD should be through the commodity price channel, so oil prices are what matters most for CAD in this environment.

"In Canada, we have been patiently awaiting a rebound in activity data after the initial shock from lower oil prices that we saw in the first half of the year. The past three weeks have offered a few mildly encouraging signs (see Data Watch below), although with commodity prices crumbling, that is a moot point now. The question now is whether we will see additional drag from the energy sector in H2, and whether that implies more easing from the BoC. The market thinks it will and is now fully pricing another rate cut by Dec./Jan", notes RBC Capital.

Other than the general sense of risk aversion and direction for commodity prices, the other big macro focus to be aware of this week is the Jackson Hole Symposium-starting Thurs and running into the weekend. The focus will be on comments from key Fed and BoE members on global risk at the moment. A calm tone from either could see Fed/BoE hikes brought forward again, in a USD and GBP positive way.

"Trading-wise, the above mentioned events reaffirm our bearish view on CAD against non-commodity FX in particular. That includes especially USD, GBP, and EUR. On the commodity crosses though, we still like going long CAD vs. AUD and NZD. In AUD/CAD we look to sell rallies with a stop above 0.9750. In NZD/CAD we like selling rallies with a stop above 0.8850", says RBC Capital.