Home USD/CAD: Buy Dips Below 1.31 On Stretched Valuation – TD
Daily Look

USD/CAD: Buy Dips Below 1.31 On Stretched Valuation – TD

The Canadian dollar enjoyed the OPEC accord, but never went too far. What’s next?

Here is their view, courtesy of eFXnews:

The song  remains the same for CAD: short covering rally buffeted diverging policy rates.  The short squeeze is strongly rooted in the recovery in oil prices following a string of positive news headlines about production cuts. Many have wondered why USDCAD has lagged oil prices but we note that correlation between USDCAD and oil has recently broken down. For instance, oil price levels have only explained about 10% of the variance in USDCAD over the past 3m and close to zero over the past six months. This compares to about 50% over the past year but that number drops to around 35% when you look at the percentage return in USDCAD and oil.

For lots  more FX trades from major banks, sign up to eFXplus

By signing up to eFXplus via the link above, you are directly supporting  Forex Crunch.

Even so, we believe that the importance of rate differentials and relative output gaps explains the breakdown in oil. Indeed, the BoC still sees about 1.5% worth of slack in the economy while most measures argue that the US economy is close to full capacity. Normally, both countries cycles move is lock-step. However, a mix of cyclical and structural factors have gnawed away at that relationship.  This leaves us focused on rate differentials rather than oil and look for the widening rate spreads to continue to drive the pair higher.

We look to buy into dips below 1.31 based on stretched valuation.

Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.