Canadian Dollar: Bullish signals point to gains versus US Dollar – Scotiabank

Scotiabank’s Shaun Osborne and Eric Theoret note that the Canadian Dollar (CAD) has lagged other G10 currencies despite a softer US Dollar (USD) tone and improving Canadian data surprises versus the United States (US). They highlight stronger CAD fundamentals and a fair value estimate for USD/CAD around 1.3930, with technicals suggesting scope for further downside in the pair.

CAD fundamentals and technicals align

"The CAD has failed to pick up much support from the generally softer USD tone that has developed over the past week. It is effectively unchanged since the day of the FOMC whereas the G10 currencies have generally strengthened. The JPY has clearly been boosted by intervention, but the NZD and AUD have both picked up more than 1%."

"While the CAD has been constrained by trade uncertainty and a Bank of Canada that appears firmly in neutral, some pick up in the currency appears overdue. Relative US/Canada data outcomes reflect a steady improvement in positive Canada data surprises versus the US."

"This is sometimes slow in getting reflected in the exchange range as monetary policy expectations adjust but there is fundamental support for the CAD from the economic data, we believe. Our fair value estimate for spot continues to edge lower, reflecting improved CAD fundamentals. The estimated equilibrium sits at 1.3930."

"Bearish—CAD technicals remain choppy but there is stronger evidence emerging that the CAD is better positioned to reverse more of its May/June decline. USD/CAD closed bearishly on the week through last Friday and short-term (daily) oscillators are tilting USD-bearish."

"A push under 1.3970/80 (former high/retracement support) should pave the way for spot to move back to a 1.38 handle. Technicals suggest fading moderate USD gains to the 1.41 zone."