Canadian Dollar: Bullish momentum points to gains against US Dollar – Scotiabank

Scotiabank strategists Shaun Osborne and Eric Theoret highlight Canadian Dollar (CAD) strength as USD/CAD trades just below their fair value estimate around 1.3895, supported by tighter US–Canada 2-year spreads and firmer commodity FX. Large speculative short CAD positioning may be squeezed further. Technically, they see aligned bearish momentum, with a sustained break below 1.39 opening scope for a move toward 1.3817 and potentially the 1.35–1.37 range.

Spread compression and downside targets

"The CAD is catching a decent bid this morning, reflecting generally firmer commodity FX on the session."

"The risk backdrop is not especially compelling—stocks are flat to mildly positive while energy and metals prices are slightly firmer—but the NZD, NOK, SEK and CAD are all sitting at or near the top of the intraday performance table for G10 FX."

"Spread compression is a clear motivation for the CAD, with the 25bps narrowing in the US/Canada 2Y bond differential since the late July peak helping underpin CAD gains."

"Spot is sitting fractionally below our latest fair value estimate of 1.3895 this morning but that may not stop the CAD from the squeezing out a little more strength in the short run. Recall that the latest CFTC data reflected a still very significant net speculative short CAD position which might be feeling the squeeze from these CAD gains. "

"Bearish—USD/CAD’s failure to take advantage of the mid-week rebound and the quick return to pressure key retracement support (50% of the May/June move up in the USD) at 1.3899 sustains the bearish outlook for the USD."

"Trend momentum signals are aligning across short-, medium-, and (now) long-term oscillators now, supporting the prospect for a significant move lower to develop. A sustained break under the 1.39 area targets a drop to 1.3817 (61.8% retracement) and potentially a return to the 1.35/1.37 range. Resistance remains 1.3965/70 and (firm) 1.4000/25."

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