"The CAD rally has run out of steam in the face of more realistic BoC tightening expectations and range-bound oil prices," explains Viraj Patel, Foreign Exchange Strategist at ING.
"On the former, the recent narrowing of two-year US-Canadian swap rates - the primary driver for USD/CAD's sharp adjustment lower - has been extreme. We look for a partial reversal as a 2H17 recovery in the US economy lifts December Fed rate hike prospects, while softer macro data in Canada questions the market's expectation for 50bp of BoC hikes by end-2018."
"Equally, we've yet to see the economic fallout from the recent CAD appreciation; the July MPR forecasts were based on USD/CAD remaining around 1.31-1.32 and any move below here can be seen as a drag on the BoC's policy reaction function."
"We believe the OECD PPP fair value of 1.27 will act as a near-term anchor point for USD/CAD. The risks are for a retrace towards 1.30 in 3Q17 as lower oil, geopolitics and softer Canadian data weigh on the CAD."
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