Soft stocks are currently affecting the Canadian Dollar (CAD) and keeping its tone defensive, according to Scotiabank’s FX strategist Shaun Osborne. He notes that while weaker equity markets could potentially drive the CAD lower, it is important to consider whether this is justified at the moment. Despite the possibility of heightened volatility in the CAD due to thinner liquidity on days when local markets are closed, Osborne believes that this is not necessarily grounded in fundamentals.
In addition to weak stocks, other factors such as spreads, crude oil prices, and the general USD tone have been favoring the CAD in recent days. This has helped keep spot trading above Scotiabank’s fair value estimate of 1.3785, which could limit the USD’s ability to push higher. However, Osborne cautions that the CAD is unlikely to gain significant ground while stocks continue to trade defensively.
Recent market movements have resulted in the CAD being pushed near the late 1.2023 high, just under 1.39. Although spot trading has since consolidated below this level, there are few signs of positive developments for the CAD on the intraday chart. Instead, the USD appears to be pausing before potentially making another attempt higher. Key levels to watch include support at 1.3790/00 and resistance at 1.3890/00 and 1.40.
Overall, market conditions suggest that the CAD may face continued pressure due to soft stocks and other external factors. While weakness in equities could lead to increased volatility in the CAD, it is essential to consider the broader economic fundamentals at play. Despite recent movements in favor of the CAD, it is unlikely to make significant gains while stocks remain defensive. Traders should keep a close eye on key levels to gauge potential price movements in the near term. By staying informed and being cautious in their trading decisions, investors can navigate the current market conditions more effectively.
