Fade rallies in USD/CAD – Scotiabank

FX Strategists at Scotiabank recommend fading occasional rallies in the pair in the near term.

Key Quotes

“The broader trend in this market remains lower, in our opinion. Firmer crude oil prices provide some additional upside potential in the CAD in the short run, beyond the still compellingly bullish short-term rate spread premium that has developed following the BoC’s hawkish turn in the past few months”.

“Our fair value model suggests that USDCAD equilibrium, based on 2- year spreads and crude oil prices, stands at 1.1993 this morning. Our model suggests that USD gains to the mid/upper 1.22s will start to “stretch” the USD’s relative over-valuation meaningfully and these sorts of levels should attract USD sellers, all else being equal”.

“Spot remains trapped in an upward tracking channel which we continue to view as a bear flag formation, implying that USD gains may extend a little more (1.2266) but that a downside break of the range channel (1.2153) will suggest strongly that the underlying trend lower in the USD is resuming. We favour selling minor USD rallies”.