Undervalued for the time being – Scotiabank

Weaker stocks tugged the Canadian Dollar (CAD) a bit lower yesterday and remain a risk for the currency in the near term as China and rising yields weigh on sentiment, Scotiabank’s Chief FX Strategist Shaun Osborne notes.

CAD slips back to mid 1.36s

“The CAD is not getting any offset to soft stocks from firm crude prices this morning as China growth worries weigh on commodities broadly. The CAD’s underperformance is driving spot back to the mid-1.36s, the top of the recent range. Firm USD gains are driving a slightly more significant overvaluation in spot by our fair value model’s estimate.”

“Equilibrium is assessed to be 1.3547 today, a big figure below spot levels and the biggest divergence with the market rate since August. Overvaluation may constrain the USD’s ability to extend gains in the short run at least. Friday’s September jobs and Q3 BoC Business Outlook survey are more relevant for markets and the policy outlook.”

“Steady and sustained gains in the USD over the past week have driven spot back to the mid-September peak at 1.3647. There is a lot of congestion in the chart between 1.36/1.38 dating back to the spring/early summer which should slow—but may not prevent—additional USD gains. The 100-day MA sits at 1.3653 to provide a bit more anchorage for spot and the short-term chart is looking pretty stretched. But a clear push through the mid-1.36s may see USD gains extend to 1.37+. Support is 1.3610/20.”