Canadian Dollar: Looks to extend recovery against US Dollar – Societe Generale

Societe Generale's Kenneth Broux reports that the Canadian Dollar has reached its strongest level in two months, with the USD/CAD pair reverting to 1.3933 from 1.4248. The pair currently trades near fair value on 2-year spread models, and a test of 1.3900 would represent a 50% retracement of the May-June rally, driven by stronger WTI oil prices and a reduction in speculative shorts.

Meanwhile, Canada's building permits are expected to lag behind US CPI in the loonie's recovery to its strongest level in two months. USD/CAD has mean-reverted to 1.3933 from 1.4248 in late June and is currently close to fair value based on 2-year bond spreads (Rsq 0.8). The loonie has benefited from a rebound in WTI oil prices above $82 per barrel, the elimination of speculative short positions, and a dovish re-pricing of the Fed following the release of Non-Farm Payrolls (NFP) data. Long CAD/short JPY is currently the best carry performer among the G10 currencies so far in August.