One of the lasting features of the COVID-19 shock is the redundancy of traditional drivers like nominal interest rates while a shift to a more lasting influence from equity markets on FX. This should be notable for pairs like USD/CAD. Tactically, analysts at TD Securities like the pair lower and believe 1.3130 is a temporary stop-gap towards a re-test of 1.30.
Key quotes
“Like much of the broader FX complex, broad USD variation and risk sentiment are dominant drivers for USD/CAD. The former is a reflection of the reflation strategy/trade where the enormous monetary and fiscal stimulus set the conditions for a global revival in growth and asset price inflation – a backdrop, we think, for USD weakness. On the other hand, one of the more notable features of this crisis is the persistence of equity/ FX correlations. We think this will become a more prominent and lasting feature in the COVID-19 era as nominal interest rates have rendered themselves moot.”
“Our long-term/slow-moving valuation models suggest USD/CAD is more fairly valued between 1.27/1.30. Tactically, we think the market’s mindset is to position itself for a Biden blue sweep. This is aided by fiscal stimulus talks (which have very little chance of passing before the election or in the lame-duck session). We view 1.3130 as the next notable point of support, but only as a temporary stop-gap to a retest of 1.30.”
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