The Canadian Dollar has underperformed its G10 peers even as the US Dollar softened over the past week and Canadian data surprises improved relative to the US. Since the day of the FOMC, CAD is effectively unchanged; by contrast, the NZD and AUD have each gained more than 1%, while the JPY was supported by intervention. CAD has also been weighed by trade uncertainty and a Bank of Canada stance described as neutral, though relative US/Canada data outcomes have continued to improve.
Scotiabank’s fair value estimate for USD/CAD is put at around 1.3930, with the equilibrium level described as 1.3930 as improved CAD fundamentals feed through. On the charts, USD/CAD ended the week with a bearish close through last Friday, and daily oscillators are leaning USD-bearish. A move below 1.3970/80 is framed as a route towards a 1.38 handle, while moderate USD rebounds towards the 1.41 zone are presented as likely to fade.
Fundamental Drivers for a Stronger Canadian Dollar
We believe derivative traders should prepare for a stronger Canadian Dollar in the coming weeks by positioning for a decline in the USD/CAD pair. Recent economic data shows US momentum is cooling, highlighted by the US unemployment rate rising to 4.3% and non-farm payrolls growing by a lower-than-expected 114,000. This shift is narrowing the economic divergence between the two nations and laying a strong fundamental foundation for the Canadian currency.
Options Strategies and Technical Outlook
In the options market, we recommend fading any short-term USD rallies toward the 1.4100 level by buying USD/CAD put options. Our estimated equilibrium for the pair sits around 1.3930, suggesting the current exchange rate is fundamentally overvalued. Historically, when the US-Canada two-year bond yield spread narrows toward 60 basis points, the Canadian Dollar rapidly claws back its losses.
Technical indicators also support this bearish USD outlook, as short-term daily oscillators are tilting downward. We expect that a clear push below the critical support level of 1.3970 will trigger automated sell stops. This move should easily pave the way for the pair to slide back down toward the 1.3800 level.
