CAD gains set to extend - Scotiabank

Canadian Dollar (CAD) gains are lagging most of its peers on the day and over the week but a 1%-plus rise since Monday so far nevertheless puts the CAD on course to extend its rebound. Evident signs of longer-term bullishness in the CAD should not be ignored, Scotiabank's Chief FX Strategist Shaun Osborne notes.

Riskies imply strengthening bullish sentiment

"USD/CAD risk reversals continue to price unusually aggressively for USD puts over calls, with the premium for 3m USD/CAD puts reaching a marginal new high yesterday (near 0.26 of a vol). Broader pricing for USD risk reversals has shifted sharply (in favour of USD puts) in recent weeks but USD/CAD pricing has been slower to adjust to weakening USD sentiment than other pairs. USD/CAD riskies have typically traded flat with a premium for USD calls. The premium for USD puts that has developed this week is the largest since 2009."

"Pricing suggests investors anticipate (and want to hedge) more downside movement in the USD in the coming months. A firm close for the CAD on the week would suggest to me that spot is likely to explore more of the lower end of the 1.35/1.40 range I think we have shifted into. Commenting after the G7 finance ministers' and central bankers' meeting in Banff, Governor Macklem said Q2 growth will be quite weak and without certainty, the economy will likely weaken further. The comments had no impact on the CAD or near-term swaps pricing, however."

"USD/CAD losses this week are set to deliver a solidly bearish weekly close signal (bearish 'engulfing line' on the weekly candle chart). USD/CAD gains have been easily held to resistance in the 1.40 zone over the past couple of weeks and more pressure is likely on key short-term support (retracement/April low) at 1.3745/50 in the next few days. Trend signals are bearish for the USD on the short- and medium-term studies. Longer run oscillators are edging USD-negative as well. A sustained push lower in funds towards 1.34/1.35 may develop on a break under 1.3745 support."