USD/CAD: Bearish setup as valuation gap narrows – Scotiabank

Scotiabank strategists Shaun Osborne and Eric Theoret note the Canadian Dollar (CAD) is making modest gains versus a softer US Dollar (USD), though it lags core majors and weakens on crosses. They estimate USD/CAD equilibrium at 1.3527, with undervaluation correcting mainly via Dollar softness. Seasonality is strongly bearish for USD/CAD in April, while recent political developments are seen as marginal for the currency outlook.

Technical break reinforces April seasonals

"The CAD is making a little headway against a generally softer USD this morning but gains are lagging versus the core majors, leaving the CAD slipping a little on the key crosses."

"The CAD’s undervaluation (equilibrium is estimated at 1.3527 currently) is slowly correcting but the process may be slow and contingent (mostly) on the USD softening rather than the CAD strengthening."

"USD/CAD seasonality is strongly bearish in April, however."

"Bearish—USD/CAD technicals lean bearish after USD losses broke trend support off the early March low last week and crashed through important support (200-day MA and the 38.2% retracement of the March rally) around 1.38 yesterday."

"Losses are nearing the 50% retracement of the March jump in the USD (1.3745) but strengthening short-term trend momentum suggests a slide to the upper 1.36s (1.3690 is the 61.8% retracement) is an obvious risk."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)