USD/CAD: Further short-term downside risk – RBC CM

Elsa Lignos,  Global Head of FX Strategy at RBC Capital Markets, explains that a number of factors are coming together which point to further short-term downside risk for USD/CAD: (1) the ongoing positive CA data surprises; (2) the rally in oil driven by geopolitical risk; (3) the shift to neutral by the BoC; (4) last night’s technical close below 1.3277; (5) US delays in fiscal reform; and (6) April seasonality (which typically sees USD/CAD sell off).

Key Quotes

“Do any of those change the long-term outlook for USD/CAD? Take each one in turn: (1) and (3) are linked; positive data surprises have driven the BoC’s shift to neutral. But the central bank also thinks that excess capacity could be even greater than estimated based on sluggish wage data. If right, it would mean little reason to deliver hikes sooner than expected.”

“Factor (2) is interesting: traditionally, ‘supply side’ shocks to oil would not be as bearish USD/CAD—the positive effect on oil would be offset by higher risk aversion. USD/CAD has been neutral to general risk appetite for some time now, so this latest supply shock is bearish USD/CAD, but we would expect that to break down if risk risk aversion keeps rising.”

“On (4), the short-term outlook is technically bearish, with a test of support at 1.3212 likely, but more broadly USD/CAD is still in the middle of its 6m trading range.”

“We still look for (5) to happen eventually, though the timing is likely to drag on. Finally, (6) is a story for another two weeks at most. Our medium-term CAD view is unchanged.”

“For the day ahead, we have February manufacturing sales. RBC is looking for an above-consensus print of +0.2%m/m (cons. -0.7%). Strong motor vehicle production in the month combined with an expected rebound in aerospace shipments is expected to underpin the increase. Falling oil prices serve as an offset.”