Canadian Dollar: Bullish momentum builds after BoC – Scotiabank

Scotiabank strategists Shaun Osborne and Eric Theoret note the Canadian Dollar (CAD) is modestly outperforming after a slightly hawkish Bank of Canada (BoC). Policy was left unchanged, but inflation risks were highlighted and December tightening is fully priced. Short-term USD/CAD technicals have turned bearish, with fair value now estimated at 1.3811 and scope for a move into the mid/upper 1.37s.

BoC tone weighs on US Dollar

"The CAD is a mild outperformer so far on the session. While the BoC left its policy rate unchanged yesterday, as expected, the bank’s messaging leant a little more hawkish than markets were expecting."

"The statement dropped the line that the “current policy rate remains appropriate” and noted that “upside risks to inflation have increased”. Governor Macklem played down the language change in the press conference but it was hard to overlook, given the broader shift in messaging."

"In response to the latest tariffs levied on Canada, the governor noted that they affected only a small sliver of Canadian economic activity and would not drive a “big ongoing impact”. A new round of forecasts will be available for the BoC’s October meeting and there is a clear sense that the revised (inflation) outlook may set the bank up to tighten."

"Bearish—All change on the technical front. A low close for the USD yesterday set a bearish outside range reversal on the daily chart which additional net losses for the USD (so far today) “confirm”. USD losses have revived short-term bearish momentum, suggesting that more USD losses are likely in the short run towards the mid/upper 1.37s. Trends should reinforce USD resistance in the 1.3900/20 zone."

"Front-end US/Canada spreads went into reverse, shedding more than 10bps and swaps are fully pricing in a 25bps for December. Our FV estimate for USD/CAD has dropped to 1.3811 (from 1.3880 yesterday)."