USD to CAD Today, Buy the Dips: CIBC

The US dollar to Canadian dollar exchange rate is at 1.2917 at the time of writing, expect further gains says Jeremy Stetch at CIBC in London who writes:

We have seen the USD to CAD retreat back from testing the 50-day MAV, currently at 1.2975.

However, that we remain well above the 1.2830 threshold suggests that there is not much appetite to chase the downside - that is unless the oil prices move aggressively higher.  

US inventory data has to be set against ongoing discussion about how quickly output in Alberta comes back on stream.

However, amidst ongoing headwinds for the sector it is notable that a Stats Canada survey has revealed the impact of the slide in investment in the sector on aggregate business spending .

The survey for 2016 details that overall business investment is set to decline by 4.4% compared to year ago levels.

The impact of the slide of investment in mining, quarrying, oil and gas is demonstrated by spending in the sector declining 23%, following a 31% decline in ’15.

Hence we maintain a topside bias in USD/CAD as oil sector investment remains on a downward trajectory while rate spreads continue to move back towards the US;  2-year spreads have moved by more than 10bp in favour of the US since the start of the month.

We retain a bias towards buying near term dips.

This comes as we envision an eventual return to the mid-1.30s into H2.

Dollar Runs Out of Momentum

We have seen the JOLTS job openings numbers detail fresh extremes in job vacancies while the Atlanta Fed GDPNow reading for Q2 has been revised up to 2.2%, due to higher assumptions of consumer spending and real fixed investment.

However, despite the positive fundamental influences we have seen the uptrend in the DXY index currently run out of momentum.

It seems we need first tier data, or fresh Fed rhetoric, to extend the USD uptrend.  

For now it can be argued that the lack of impetus, despite the data, is due to ongoing EUR inertia and a USD JPY reversal. We would argue the latter is likely to prove contained, likely due to ongoing BoJ/MoF rhetoric.

Moreover, should upcoming Fed speakers, there are two ’16 voting FOMC hawks slated to speak tomorrow, maintain a bias towards two rate hikes this year, we would expect the broad DXY uptrend to remain in play.

We have seen front end yields retreat substantially since levels seen at the time of the December hike. The realisation that the data is improving into Q2 and that the market is too sanguine regarding prospective rate hikes suggests the approximate 30bp reversal in two year yields should unwind, providing USD support in the process.

In the near term we need to see the Dollar index break back above strong resistance at  around 94.42. This may prove a tough ask without support from Fed rhetoric, hence USD longs may have to remain patient, at least in the near term.