CAD slide on CPI looks overdone but technicals are weak - Scotiabank

The Canadian Dollar (CAD) started off yesterday's session underperforming and continued to slide over the rest of the day following the release of softer than expected headline CPI for July, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

Risk of a further push higher is hard to ignore

"Yields retreated marginally after the data but the report, which included still elevated core inflation readings, was in no way solid proof that the BoC will adjust rates lower next month. September swaps priced in an additional couple of basis points of easing risk into the curve but pricing still suggests a little more than 30% risk of a 25bps cut. Bond and swaps spreads are little changed, suggesting something of an overreaction in the spot rate."

"USD/CAD's estimated fair value has edged up a little (1.3701) but the USD's deviation from its equilibrium is now quite significant at one standard deviation. USD gains look stretched, all else equal. The USD's push higher from the 1.38 area easily extended through resistance in the low/mid 1.38s and gains enjoy solid support from intraday and daily trend strength oscillators. These signals suggest the USD move up might extend."

"Short-term price action suggests the USD gains are stalling around 1.3880, the high from August 1 (NFP day), however. This should be firm resistance for spot, given the hefty USD fall (and the bearish price signal) that developed that day. The risk of a further push higher is hard to ignore though, given the momentum behind the USD at the moment. Above 1.3880/90 would suggest a retest of the 1.40 area."