USD/CAD softness runs counter to USD strength typically seen this time of the year - Scotiabank

Strategists at Scotiabank see the USD as being quite significantly undervalued against the CAD, by nearly one standard deviation below their fair value estimate—1.3499 today. To add insult to injury, USD/CAD softness also runs counter to the usual strength in the USD typically seen this time of the year, they noted.

Key Quotes

“The BoC kept policy unchanged yesterday and the accompanying statement was unusually short and sweet, neglecting any reference to the usual risk assessment around the inflation outlook. The undertone was a little dovish, in our opinion, mainly because the BoC chose to highlight slowing growth ahead and the policy divergence underway between Canada and the US. There’s really not much new in that story itself but Gov. Poloz referred to the situation in a recent interview and it has now crept into the official narrative. Emphasizing your disadvantage relative to another is an invitation for markets to push your currency lower—an invitation markets are currently ignoring.”

“Short-term US-Canada spreads are holding gains from early week lows while crude oil prices remain capped above $50/bbl. All in, firmer spreads and softer crude are not being adequately reflected in USDCAD; we see the USD as being quite significantly under-valued at this point (by nearly one standard deviation below our fair value estimate—1.3499 today). To add insult to injury, USDCAD softness also runs counter to the usual strength in the USD that we typically see this time of the year.”

“USDCAD short-term technicals: neutral/bearish—USDCAD just can’t seem to hold a bid at the moment. The steady leak lower in the market is extending below retracement support at 1.3230 and now risks slipping towards the mid/upper 1.31 area. Short-term trend resistance now stands at 1.3290.”