CAD is about as 'undervalued' as it was in the spring – Scotiabank

Canadian Dollar (CAD) softness is extending as markets look ahead to next week’s BoC policy decision and the prospect of a 1/4 point cut in the target rate, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

CAD slips further on the day

"Markets are 85-90% priced for a total of 50bps of BoC cuts by year end. The US/Canada 2Y swap spread has widened around 10bps over the past couple of weeks to around 92bps but retains the broader downtrend seen in place in the past few months. Spot is deviating more significantly from our—largely stable—fair value assessment which sits at 1.3643 this morning, little changed from yesterday or the start of the month."

"The spot rate is two standard deviations above the equilibrium estimate, leaving the CAD about as “undervalued” as it was in the spring amid all the worry about tariffs. PM Carney said yesterday that he will announce the first round of major projects aimed at boosting growth, among other things, today. But that may not be enough to lift the spirits of the CAD which is being weighed down by rising market concerns about the economic headwinds facing Canada following the weaker than forecast August jobs data."

"USD gains through resistance in the mid 1.38 area pave the way for a retest of what should be firm resistance defined by the late August high at 1.3925. Trend momentum is firming, however, raising the risk of spot gains extending to the 1.3965 area—the top of the channel in spot prevailing since July. Support is 1.3835/55."