USD/CAD bearish with caution in the near term – Scotiabank

FX Strategist at Scotiabank Eric Theoret noted the pair’s outlook stays cautiously bearish in the near term.

Key Quotes

“Relative central bank policy remains dominant in an environment of softening Fed expectations as market participants consider the outlook for the Bank of Canada following Wednesday’s 25bpt hike. The BoC struck a relatively optimistic tone with a focus on broadening growth and transitory disinflationary pressures as it pulled forward the timing for the anticipated closing of the output gap to ‘the end of 2017’ from ‘the first half of 2018’ in the April MPR. October hike expectations are nearing 50% and the 2Y U.S.-Canada yield spread has narrowed to 15bpts. The Bank of Canada remains data dependent and intends to assess the impact of policy tightening in the context of elevated household indebtedness”.

“Momentum indicators are bearish but also oversold and suggestive of near-term caution following Wednesday’s impressive USDCAD decline. Wednesday’s move cleared the last remaining Fibo retracement level (76.4% at 1.2775) of the May ‘16-’17 rally, leaving no major support ahead of the May 2016 low at 1.2461. In terms of near-term resistance, we look to the upper 1.27 area followed by 1.2820”.