CAD extends recovery to 1.43 area - Scotiabank

Tariff worries are easing--for now, at least--which is allowing the CAD to stabilize. The hefty swing lower in the USD from the early week peak may not extend much further for now but the sell-off is material, Scotiabank's Chief FX Strategist Shaun Osborne notes. 

Firm USD support likely in mid/upper 1.42s

"Unless trade talks deteriorate significantly again, there is a chance that the USD/CAD peak reached Monday near 1.48 will represent a significant high-water mark for spot. Spot has priced in some tariff risk over the past few weeks (perhaps something in the region of 10%-plus) so investors could start to price that risk out again in the coming weeks *if* confidence grows that the US will not resort to any additional tariff action." 

"That's still a pretty big "if" though. Short-term spreads are about 50bps wider than early November, however, and the huge US/Canada interest rate differential will limit just how much of a rebound the CAD will see in the next few weeks at least. Spot fair value has eased to 1.4391, driving a minor, and unusual by recent standards, CAD overvaluation relative to its estimated equilibrium." 

"CAD-positive signals are piling up on the charts. After Monday's big, daily reversal signal, price action through the middle of the week reflects a potential bearish weekly reversal as well. Spot closed below its 40-day MA for the first time since early October yesterday. But there were a number of CAD-positive technical developments evident on the charts through late January which yielded no CAD improvement so markets may not buy into the idea of a big CAD rally too willingly just yet. The early January low at 1.4260 represents major support ahead of a push back to 1.40/1.41. Resistance is 1.4350/75."