Scotiabank strategists Shaun Osborne and Eric Theoret report that the Canadian Dollar (CAD) is drifting lower, influenced by positive momentum in the US Dollar (USD) and a widening valuation gap between the two currencies. This gap is attributed to weaker terms of trade and declining oil prices, which have shifted Scotiabank's equilibrium estimate for USD/CAD higher this morning. Despite the lack of fresh news or developments, the momentum currently favors the USD, pulling USD/CAD away from its fair value estimate [1].
The strategists note that levels above 1.37 in USD/CAD are considered attractive for USD sellers, indicating potential value at these levels. Technical analysis suggests that the USD's recent push above the mid-1.37 area increases the risk of an 'overshoot' towards the 1.3800/10 zone. However, it remains uncertain whether the low 1.38 zone can cap the USD's advance, as there are several longer-run moving average resistance points just above this figure that may slow further gains. Specifically, the 200-day moving average is at 1.3804 and the 50-week moving average is at 1.3803 [1].
Further resistance is identified at 1.3930, while support is seen in the 1.3650/75 range. The strategists suggest that a reprieve for the CAD is unlikely in the near term, but emphasize that the current valuation gap would typically prompt a high conviction call for a mean reversion move in spot [1].
CONCLUSION
The USD/CAD pair is experiencing upward momentum, driven by weaker Canadian fundamentals and lower oil prices. While technical resistance may slow further USD gains, strategists see current levels as attractive for USD sellers. Market participants should monitor resistance and support levels closely as the valuation gap persists.