The US Dollar to Canadian Dollar (USD/CAD) exchange rate has retreated to around 1.4160 after reaching highs above 1.42 earlier this month, with the Canadian Dollar showing signs of stabilising following its steep May and June losses.
Scotiabank believes the CAD sell-off may have run its course as short-term US-Canada interest-rate spreads reverse some of their earlier widening.
The bank expects Canada’s June labour-market report to be an important near-term test. Economists forecast a 10,000 increase in employment, unchanged unemployment at 6.6% and a modest rebound in wage growth.
Scotiabank notes that May delivered an unusually strong 87,800 rise in employment, driven by large full-time job gains and an increase in hours worked.
According to the bank, “decent job gains, firm wages and more gains in hours worked would be positive for the CAD”, potentially allowing USD/CAD to make another attempt below 1.4150.
A more substantial Canadian Dollar recovery would still require a clearer narrowing in US-Canada rate spreads. Scotiabank believes that could become more likely if upcoming US inflation data are softer than expected.
From a technical perspective, the bank says price action supports the view that the US Dollar rally has peaked, although bullish momentum has not yet been decisively broken.
A sustained move below 1.4150 would open the way towards 1.4075-1.4080, while Scotiabank remains confident that the 1.4250-1.4300 region will cap renewed USD gains.
