Canadian Dollar: Consolidation with stretched USD positioning – Scotiabank

Scotiabank strategists Shaun Osborne and Eric Theoret note the Canadian Dollar (CAD) is effectively flat versus the US Dollar (USD) and trading close to their fair value estimate around 1.4158. They expect the recent deterioration in spreads to stabilize, easing downside pressure on the CAD. Short-term, USD/CAD is consolidating with an overbought USD, facing resistance near 1.4250/00 and support at 1.4150 and 1.4075/80.

Fair value and range parameters

"The CAD is effectively flat against the USD and outperforming, if only marginally, most of its core peers as a result. Factors driving the CAD are relatively steady; our fair value model for the CAD indicates equilibrium of 1.4158, slightly weaker for the CAD than yesterday, suggesting that the CAD is about where it should be from a fundamental point of view."

"More broadly, we think the deterioration in spreads seen since early May should stabilize which will at least ease downward pressure on the CAD from here, all else equal."

"The BoC Q2 Business Outlook Survey reflected slower domestic sales growth expectations and worries about more persistent inflation—reflecting the anticipated fall out from the Iraq conflict."

"Employment intentions remain soft but business investment intentions remain firm, at least in part due to robust oil prices driving plans in energy-related sectors. The survey suggests no resolution to the slow growth/high inflation look to the economy that is keeping the BoC on the sidelines."

"Neutral—USD/CAD continues to consolidate. The USD remains extremely overbought but there is a risk that the sideways movement in funds is merely a consolidation ahead of another push higher. The 1.4250/00 range should continue to offer resistance to a USD advance. Support is 1.4150 and 1.4075/80."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)