CAD resilient despite tariff threats and BoC cut - Scotiabank

The Canadian Dollar (CAD) navigated metals tariffs and the BoC rate cut with relative ease yesterday, Scotiabank's Chief FX Strategist Shaun Osborne notes. 

USD looks highly overvalued

"The Bank would not--could not--provide much clarity around the outlook for policy, given the uncertainties for growth and inflation that this trade war will generate. Macklem stressed that the Bank did not want to see first round price increases (from tariffs) having a knock-on effect on other prices. Markets pared a few bps from easing expectations over the balance of the year but were still discounting roughly 45bps of additional cuts through December at the close last night." 

"Overall, the CAD looks relatively resilient. The recent narrowing in US/Canada term spreads is providing some anchoring for the CAD despite headwinds from tariffs. In fact, USDCAD is trading two standard deviations above our FV estimate (1.4095), with the USD the most overvalued since 2022 this week. Stretched valuation tilts risks towards a push under the mid-1.43 area at least in the short run." 

"Spot trends are tilting a little more bearish for the USD after early week gains were capped in the low 1.45 zone. USD losses yesterday add to the USD-negative look of short-term price action and the picture of strong resistance developing in the low/mid 1.45 area now. USD support sits at 1.4350 still and while the USD looks technically prone to more losses, it continues to enjoy solid, bull momentum on the intraday and daily oscillator studies. That may mean that CAD gains through the 1.4350 zone may be grinding and perhaps limited to the mid/upper 1.42s."