The Canadian Dollar remains stable as markets await upcoming US data. Factors influencing the CAD have weakened slightly, with a fair value estimate rising to 1.3685. Despite this, a strong US Dollar is mitigating CAD’s undervaluation.
Bank Of Canada Survey
The Bank of Canada’s Q2 survey indicates a consensus for two 25bps cuts with the CAD expected at 1.35 by year-end. Current market swaps suggest only one rate cut is priced in for the remaining year. The year-end forecast for USD/CAD stands at 1.34, with upcoming data including Canada’s Building Permits for June.
The USD/CAD rate remains steady but is showing bullish momentum in short-term analyses. The USD faces resistance at 1.3810/30 and may challenge major resistance in the upper 1.38s. Support levels are noted at 1.3720/30, while the USD requires more effort to surpass these resistance points.
We are currently seeing the USD/CAD pair trading in a tight range around 1.3750. While our models suggest the CAD is undervalued, the persistent strength of the US dollar is the dominant factor for now. Looking back, this reminds us of the dynamic in late 2023 when US economic outperformance dictated the market’s direction.
There’s a significant disconnect we can trade on between official sentiment and market pricing. With Canada’s latest July inflation report showing a dip to 2.8% and sluggish job growth, the argument for a second Bank of Canada rate cut this year is gaining strength. However, current swaps are only fully pricing in a single cut by October, creating a potential opportunity if the central bank turns more dovish.
Technical Boundaries
For the next few weeks, we should watch the technical boundaries closely, as they define the current battlefield. The USD faces a tough ceiling in the 1.3810 to 1.3830 zone, which has held firm multiple times this summer. This suggests selling USD strength with call options or using that level as a stop for short CAD positions could be a prudent strategy.
The main reason for this ceiling is the unwavering strength of the US dollar, supported by recent data. US inflation for July came in stubbornly high at 3.3%, which keeps the Federal Reserve on hold and supports the greenback. Therefore, any long CAD positions are essentially a bet against continued US economic resilience.
We must also keep an eye on commodity prices, a traditional driver for the loonie. West Texas Intermediate crude oil is holding steady near $85 a barrel, providing a soft floor of support for the Canadian currency. This acts as a slight counterweight to the interest rate narrative, preventing a more dramatic weakening of the CAD for now.
