The Canadian dollar is looking for a new direction, with many moving parts. The team at TD lays down the 3 risks:
Here is their view, courtesy of eFXnews:
The recent bump in USDCAD is consistent with the lift in shortterm rate differentials.
The 2y US-CA spread sits around 43bp. Historically, this level has been consistent with USDCAD at 1.36 leaving it at a steep discount to one of its key cyclical drivers. The broader improvement in risk appetite has probably insulated CAD to some degree. However, we also think the market is pricing a small Trump premium on the greenback. Even so, positioning data shows a large buildup in CAD long exposure. IMM data has seen net long CAD exposure over the past six weeks, and long exposure is approaching the highest level since mid-2016. Our sentiment indices show CAD with the largest buildup in long exposure over the past 3 months.
We think this leaves CAD vulnerable to a mix of 1) SOTU 2) stronger US data and 3) BoC risks. The upside break of the 1.3130 level opens up a test of 1.3250.
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