USDCAD to end the year around the 1.30 area - Scotiabank

Shaun Osborne, Research Analyst at Scotiabank, expect the USDCAD to end the year around the 1.30 area, little changed from current levels but also expect the CAD to retain a defensive undertone against the USD in the next few months at least as Fed tightening risks overshadow other potential drivers of the CAD’s performance.

Key Quotes

“The CAD remains a strong performer in year-to-date terms but the past month has seen the CAD retreat against the USD for the first time since January. A number of factors have come together to check the CAD’s recovery. Firstly, the relative outperformance of the Canadian economy over the US is poised to reverse in Q2; Canadian activity has been clipped back by the impact of the wildfires in Alberta and the US economy now looks poised to recover from a weak start to the year. Consequently (and secondly), interest rate differentials — which had narrowed against the USD earlier in the year — have started to widen in the USD’s favour again, reflecting better US growth dynamics and clear messaging from the Fed to prepare for policy tightening.

A third factor is that crude oil prices have settled into a trading range and, capped around $50/bbl, provide much less support for the CAD than earlier in the year when prices were recovering strongly. Our own correlation studies reflect a decline in the influence of commodity prices on the CAD and an increase in the influence of short-term interest rate differentials on spot in the past few weeks.

Fundamental factors favour the USD appreciating modestly at least against the CAD in the near-term. This development conforms to the typical seasonal trend (modest USD appreciation) seen through mid-year and is reflected in more USD-bullish price signals on the technical charts which suggest the risk of a push higher towards 1.35 or so on a 1-3 month time horizon. Speculative positioning is also shifting against the CAD; IMM data have reflected a bullish bias on the CAD since February but data through late May suggest investor sentiment is moderating at least.”