Scotiabank strategists Shaun Osborne and Eric Theoret note the Canadian Dollar (CAD) is drifting lower as positive US Dollar momentum pulls USD/CAD away from their fair value estimate. They highlight a significant valuation gap driven by weaker terms of trade and lower Oil prices, but still see levels above 1.37 as attractive for USD sellers, with key resistance clustered just above 1.38.

CAD pressured as valuation gap widens

"The CAD continues to drift lower. Fresh news and developments are scant but momentum favours the USD, tugging the CAD away from our fair value estimate. That equilibrium estimate has shifted a little higher this morning (lower oil prices, weaker terms of trade) but the valuation gap remains significant (well above one standard deviation) which would ordinarily drive a high conviction call for a mean reversion move in spot."

"We are unlikely to get much of a reprieve for the CAD for the moment but we still rather think that 1.37+ levels in spot still offer value for USD sellers."

"Neutral/bullish—We noted earlier this week that the USD’s push above the mid-1.37 area would raise the risk of an “overshoot” towards the 1.3800/10 zone. It is not clear whether the low 1.38 zone can cap the USD advance but there is a collection of longer run MA resistance points just above the figure that may slow the USD’s gains. The 200-day MA sits at 1.3804 and the 50-week MA sits at 1.3803."

"Resistance above the low 1.38s comes in at 1.3930. Support is 1.3650/75."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)