Scotiabank sees the Canadian Dollar as marginally undervalued, with USD/CAD momentum stretched and BoC rate hikes potentially underpriced.
Four consecutive daily gains gave way to a modest retreat in the US Dollar to Canadian Dollar (USD/CAD) exchange rate on Friday, as Scotiabank questioned how much further the rally could run.
The pair finished at 1.4140, down 0.05% on the day but still around 1.1% higher over the week.
Scotiabank’s concern centres on the interest-rate expectations supporting US Dollar demand:
“Wider US-Canada spreads have been a major headwind for the CAD over the past couple of weeks, however the move feels somewhat stretched with limited scope for further tightening in Fed expectations while the BoC feels somewhat underpriced.”
Its Friday assessment put the probability of an October Bank of Canada quarter-point hike at roughly 50%, with 34 basis points of cumulative tightening priced by December.
Thursday’s retail sales release showed a 0.7% July decline, followed by an advance estimate of a 1.3% August rebound that remains subject to revision.
Scotiabank said the figures had little currency impact and placed USD/CAD fair value at 1.4055, suggesting modest Canadian Dollar undervaluation.
That valuation estimate is roughly 85 pips below Friday’s close, without specifying when the exchange rate might return there.
The bank still classifies the short-term technical outlook as bullish/neutral, despite signs of stretched momentum:
“The rally in USDCAD looks overdone at this point however, with momentum already in overbought territory given the RSI at 72.”
It expects considerable resistance around 1.4200 after the pair struggled to extend gains above the mid-1.41s.
Should the advance reverse, Scotiabank sees relatively few obstacles before a larger pullback:
“To the downside, we see little in terms of support between current spot and the psychologically important 1.40 level.”
Our currency coverage draws on live market data, official economic releases and published bank research.
