USD to CAD Pair Hits a Wall at 1.3000 BUT Keep Buying the Dips Argue Strategists

canadian dollar 1

The US dollar has held onto its May gains against the Canadian dollar despite the increasingly bullish oil price. 

  1. "We continue to think risks are tilted towards a rise" - Scotiabank.
  2. "1.2830 threshold suggests that there is not much appetite to chase the downside" - CIBC.
  3. Lloyds confirm downside bias on USD/CAD in latest forecast note

The Canadian Dollar (CAD) took full advantage of the soft start to 2016 suffered by the Greenback having pushed the dollar from highs at 1.45 in January to the 1.25s in late April.

The revival in the dollar at the start of May, supported the US side of the pair, and led to a recovery in USD/CAD from 1.2500 to 1.3000, however, the pair came under substantial selling pressure at those levels and has subsequently moved back into the 1.29s.

Has the pair now finished its upside correction, or could it still go higher?

Scotiabank’s FX Strategist Shaun Osborne thinks the pair is likely to rise higher, reaching the 1.33-34 level eventually.

USD to CAD rate to go higher

“We continue to think risks are tilted towards a rise to 1.33/1.35 in the next few weeks. Buy USD dips,” Osborne suggests.

Jeremey Stretch, of CIBC Capital Markets also sees the potential for more upside in USD/CAD, remarking:

“The 1.2830 threshold suggests that there is not much appetite to chase the downside - that is unless the oil prices move aggressively higher."

The dramatic call in Capital Spending in the Oil and Gas, Mining and Quarrying Sector of the economy is one of the reasons Stretch gives for the upside bias:

“The impact of the slide of investment in mining, quarrying, oil and gas is demonstrated by spending in the sector declining 23%, following a 31% decline in ’15. Hence we maintain a topside bias in USD CAD as oil sector investment remains on a downward trajectory.”

The relative outperformance of US versus Canadian government bond rates is expected to further support USD, as investors tend to prefer bonds with greater returns:

“Rate spreads continue to move back towards the US; 2-year spreads have moved by more than 10bp in favour of the US since the start of the month. We retain a bias towards buying near term dips. This comes as we envision an eventual return to the mid-1.30s into H2.”

Regarding the pound's prospects against the Canadian dollar, Scotiabank's Osborne says of the GBP/CAD’s technical structure that it has formed a rounding-bottom which is evidence a more significant low is now in place and higher-highs more likely than not:

“Technically, we think the trend up is well-entrenched on the shorter-term charts and we think the rounded low which formed through April is indicative of an important based potentially forming.”

Although noting resistance at 1.8780, Osborne is confident the young trend higher will extend up to 1.9150/9200 eventually.

How Much of an Impact will the Wildfires Make?

The smoke is only just clearing from the wildfire at Fort McMurry Alberta but already analysts are debating how much of an impact the decimation of this oil town will on the greater Canadian economy.

NBF Bank’s Krishnan Rangasamy suggests that a worst case scenario would lead to a few basis points off annual GDP:

“Under the worst case scenario, we would have had to trim a couple of ticks from our 2016 growth forecast. But we seriously doubt oil capacity will be curtailed for a full two months. The less pessimistic scenarios show negative impacts that are not significant enough to prompt us to change our forecast of 1.3% GDP growth for this year.”

Not all analysts are as optimistic as Rangasamy, however, as some have estimated up to a 0.25% fall in GDP as a result of the wildfires.

Lloyds Bank’s Adam Chester highlights increased concerns from Bank of Canada’s governor Poloz (as expressed at the press confernece of the BOC meeting on April 13) that the strong currency is hampering the performance of non-resource exports, which the economy needs to rebalance. Overall he sees no change in policy or cut in interest rates as the best case scenario.

Chester reminds us, however, that not all Canadian fundamentals are negative:

“The CAD appreciation was primarily driven by a firming in oil prices and a resilient Canadian economic outlook. The labour market tightened further last month and retail sales outperformed market expectations.”

He ends his CAD section forecasting a move back down to 1.25 in USD/CAD, based on oil rising higher and BOC leaving policy unchanged.