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CAD tipped to stabilise ahead of potential recovery on medium-term horizon.
One of Canada's leading FX analysts says the Canadian dollar is looking undervalued and could soon turn a corner.
The call by Shaun Osborne, who is the Chief FX Strategist at Scotiabank, comes following last week's Canadian employment data that caught the analyst community by surprise owing to its strength; the economy filled 87,800 jobs in May, well ahead of the 10K expected by the analyst community.
"I've misjudged the CAD outlook over the past few weeks but solid employment gains in May support the notion that the Canadian economy is regaining momentum after a soft start to the year," says Osborne.
The data marks a positive spot on an economic calendar that has disappointed over recent months, with a soft run of figures culminating in headline GDP that showed the economy was in a technical recession at the start of the year. The data served to underpins a run of CAD underperformance:
The CAD fell 1.57% against the dollar in May and is a further 1.0% lower already in June. CAD weakness is also apparent on the crosses, with GBP/CAD looking to record a fourth consecutive monthly gain in June. EUR/CAD rose 1.0% in May and is flat so far in June.
However, Osborne thinks the employment surprise could signal the start of a more resilient trade for CAD. He looks for the currency to "steady".
"Our suite of charts above lean towards the idea of near-term CAD stabilisation after its poor run since early May," he says.
Medium-term, valuations are attractive: "The CAD is certainly undervalued, relative to our equilibrium estimate which is showing tentative signs of reversing after aligning with the weakening trend in spot in recent weeks," adds Osborne.
Regarding the dollar, the analyst says the USD looks technically robust, "but the USD rally is very stretched."
Above: GBP/CAD and USD/CAD looking 'toppy' on the charts.
