USD slide/CAD rebound can extend – Scotiabank

The CAD had a solid week last week, rising over 1% against the USD in its best weekly performance since July. Economists at Scotiabank analyze Loonie’s outlook.

CAD rebound may have traction

The odds of some further CAD gains (USD weakness) in the next few weeks look decent. And the ceiling on spot around 1.39 which had been under pressure again in recent weeks looks a lot firmer now.

USD/CAD developed a bearish key reversal week through last Friday; after reaching a new cycle high just shy of 1.39, the USD closed out Friday near 1.3655, just below the prior week’s low. Such a strong, bearish reversal signal at such a key point on the chart is hard to ignore. It might not portend to a significant decline in the USD (although it could) but it does strongly suggest the period of sustained USD gains seen in recent weeks is over. 

Friday’s Commitments of Traders Report highlighted that speculative, real money (institutional) and leveraged (hedge fund) accounts retain a significant net short CAD position. The net short is close to recent extremes and not far off the peak CAD-bearishness seen in the spring (just prior to the snap higher in the CAD). CAD shorts are prone to a squeeze if the USD continues to slide.