CAD: Durably strong – SocGen

Olivier Korber, Research Analyst at Societe Generale suggests that after a 12% appreciation against the US dollar since April, they now expect the Canadian dollar to confirm these durable gains over the medium term.

Key Quotes

“Oil performance has been instrumental in boosting the currency, even though the longterm picture suggests that the currency has largely overshot the rebound in oil prices. However, the CAD is on the right track to remain strong as the interest rates factor takes over from the commodity factor, with CAD rates climbing above USD rates for the first time since 2014.”

Bank of Canada on a steeper path. Indeed, the CAD recently was boosted by the BoC's decision to raise rates to 1% earlier than expected, on the back of a brighter-than-expected economic performance. In particular, growth indicators surprised on the upside (consumer spending, employment) even though inflation has not yet reached the 2% target. Market pricing is currently more hawkish for the BoC than it is for the Fed, as it is discounting a 50% probability that the next BoC hike will happen in December, and sees decent odds for one or even two additional hikes in 2018. Already hawkish expectations nevertheless limit the potential appreciation of the currency.”

Buoyant USD/CAD price action but still room at the bottom. Our technical analysts warned that breaking below 1.24 would be pivotal. This corresponded to the rates repricing and triggered the latest wave of weakness, still on its way to pressure the USD/CAD towards its next major support (2015 low) in the 1.2050/1.19 region.”

Valuation suggests upside risks. PPP valuation considerations certainly matter more than in the past. In the commodity currencies bloc, the CAD is close to fair value but the risk of a spike higher is greater for it than for the AUD or even the NZD). In particular, the Australian dollar is largely overvalued, suggesting that short AUD/CAD is an attractive valuation-based relative value trade.”

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