CAD extends recovery to 1.43 area – Scotiabank

Tariff worries are easing—for now, at least—which is allowing the CAD to stabilize. The hefty swing lower in the USD from the early week peak may not extend much further for now but the sell-off is material, Scotiabank's Chief FX Strategist Shaun Osborne notes. 

Firm USD support likely in mid/upper 1.42s

"Unless trade talks deteriorate significantly again, there is a chance that the USD/CAD peak reached Monday near 1.48 will represent a significant high-water mark for spot. Spot has priced in some tariff risk over the past few weeks (perhaps something in the region of 10%-plus) so investors could start to price that risk out again in the coming weeks *if* confidence grows that the US will not resort to any additional tariff action." 

"That’s still a pretty big “if” though. Short-term spreads are about 50bps wider than early November, however, and the huge US/Canada interest rate differential will limit just how much of a rebound the CAD will see in the next few weeks at least. Spot fair value has eased to 1.4391, driving a minor, and unusual by recent standards, CAD overvaluation relative to its estimated equilibrium." 

"CAD-positive signals are piling up on the charts. After Monday’s big, daily reversal signal, price action through the middle of the week reflects a potential bearish weekly reversal as well. Spot closed below its 40-day MA for the first time since early October yesterday. But there were a number of CAD-positive technical developments evident on the charts through late January which yielded no CAD improvement so markets may not buy into the idea of a big CAD rally too willingly just yet. The early January low at 1.4260 represents major support ahead of a push back to 1.40/1.41. Resistance is 1.4350/75."