CAD: Rally faces a fundamental reality check - ING

Eren Sengezer FXStreet

"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.

Key quotes:

"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."

Author

Eren Sengezer

FXStreet

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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