USD/CAD to be underpinned by monetary policy divergence - TDS

Analysts from TDS still prefer to follow the USD/CAD pair rather than fade the rallies with sights on 1.35.

Key Quotes:

“The one-two punch of strong US and weak Canada data has sent CAD reeling. Indeed, the pair is close to finishing around 1.32, which is a level it only closed above once in the past three months.”

“We flagged CAD downside risks in the dollar bloc in mid-July and still favour holding short CAD exposure against most of the majors—bar some European currencies. For USDCAD, we still prefer to follow rather than fade the rallies with sights on 1.35.”

“We think the shift in data momentum in the US and Canada and the possible policy implications are likely to reinforce fresh highs in USDCAD in H2. On the US side, the divergence between forward-looking and backward-looking data is favouring the former. For one thing, while last week’s GDP release was soft, it was also clouded by inventories.  This suggests some payback in H2.”

“With markets probably still underpricing the policy divergence theme between the Fed and the BoC in H2, a shift to put the Fed and BoC back in play in the coming months should underpin USDCAD in H2.”