The US Dollar to Canadian Dollar (USD/CAD) exchange rate strengthened to 1.3789, extending this month’s recovery after softer-than-expected Canadian inflation data dampened expectations for further Bank of Canada tightening.
Scotiabank notes that the Canadian Dollar has underperformed recently as front-end yields and rate spreads moved against the currency.
“The CAD is a moderate laggard on the session, with this week’s softer than expected CPI and the softening in front-end rates/spreads still weighing on its performance.”
Despite the recent move higher in USD/CAD, the bank believes the Canadian Dollar already looks undervalued relative to fundamentals.
“Markets are less inclined to lean too hard on the CAD at the moment perhaps, given that the CAD already looks ‘cheap’ against underlying fundamentals.”
Scotiabank estimates fair value for USD/CAD at 1.3614, leaving the US Dollar around one standard deviation above equilibrium levels.
Scotiabank expects the Dollar to Canadian Dollar exchange rate (USD/CAD) to retain a bullish near-term bias, with scope for gains towards the 1.3800-1.3815 area, although momentum appears to be slowing after the recent rally.
“USD gains through retracement resistance at 1.3758 have not extended significantly but still hold the potential for the USD rise to reach 1.3800/15.”
The bank identifies initial support around 1.3730 should the pair consolidate.
