USD/CAD: Buy for a target of 1.3225 - BAML

Analysts at BofA Merrill Lynch are recommending to buy USD/CAD spot using current spot level of 1.2680 for a target of 1.3225 (estimated declining 50wk SMA) with a stop at 1.2425 (rising 200wk SMA).

Key Quotes

“Good news on CAD is in the price

CAD has performed strongly since May as the economy showed signs of momentum and as the Bank of Canada signaled its intention to withdraw emergency policy stimulus. However, we believe that near-term market optimism looks excessive particularly against the backdrop of elevated Canadian macro data surprises. The Canadian rates market currently expects another 25bps rate hike by end of 2017 versus our own expectations for a further move in Q1 2018.”

“CAD strength may become a concern

We are constructive towards the USD into the end of the year as expectations around US growth and tax reform have been marked significantly lower. With our oil analysts expecting little in the way of a meaningful rally in crude price, we think that the recovery in USD/CAD could continue in the weeks ahead. Whilst the Bank of Canada has so far been relaxed about the appreciation of the CAD, it will be concerned that the Canadian trade balance has moved sharply back into deficit in recent months. In 2017, virtually all the improvement in the trade balance has been given back.” 

“CAD Positioning looks stretched

We also note that on a 1-year look back basis, CAD positioning is max long versus USD positioning which is max short. CFTC positioning in particular looks stretched and ahead of key Canada data releases over the coming month (CPI, retail sales, manufacturing sales), these longs look vulnerable. Seasonality also looks constructive for a continued bounce in USD/CAD. Furthermore, seasonality historically supports a higher USD/CAD into the end of the year, with August and November historically good months over the past 10 years.”  

“Long term levels hold despite USD/CAD drop

The decline formed a base near the May 2016 lows and just above the rising 200wk simple moving average. Oversold conditions reached some of the deepest on record since 2007. While above support, we see a corrective rally underway. We note topside key levels of 1.2850, 1.3000, declining 50wk SMA and a year-end trend line juncture of 1.3350. We estimate support at the rising 200wk SMA and lows of about 1.24-1.2430 as well as the long term rising trend line.”

“USD/CAD skew supports topside move

Our quant model shows that USD/CAD is about to move higher. Although the recent trend in spot has been down, MAA is starting to pick up. In addition, the Residual Skew for calls indicates a likely rally in spot. The topside options demand suggests a reversal in investors’ conviction. Up-down volatility is no longer bearish and has turned to neutral, pointing to a reduction in downward momentum.”