Canadian Dollar: Weak fundamentals cap gains against US Dollar - BNY

Societe Generale strategists anticipate the USD/CAD exchange rate may encounter a short-term resistance level around 1.3990/1.4030, following its recent rebound from 1.3730. Should the pair fail to break above this resistance, a continuation of the current downtrend may ensue, with the 1.3840 level acting as initial support. Macroeconomic factors, including the Bank of Canada's cautious stance and projected economic outlook, suggest a more patient approach, though geopolitical tensions could introduce a more hawkish tone.

With USD/CAD recently hitting the target projection of 1.3730, the July low and 50-day moving average near 1.3990/1.4030 could serve as significant resistance in the near term. A failure to hold above these levels might indicate the onset of another decline phase. In Canada, markets expect the Bank of Canada to maintain the policy rate at 2.25% for a seventh consecutive meeting, indicating confidence that current policies are adequate for inflation to return to target in the medium term.

While headline Canadian inflation rose above 3.0% in July due to higher energy prices, core inflation remains slightly below the 2.0% target. The BoC's latest projections foresee both growth and inflation averaging around 2% through 2027 and 2028, reinforcing the case for patience. From a technical perspective, USD/CAD appears undervalued based on 2-year interest rate differentials; Canadian yields must rise, and the spread between them narrow from 133 basis points to validate the Loonie's current valuation near 1.39.

Whether recent tariff tensions between the US and Canada will erode this confidence remains to be seen, with Governor Macklem's upcoming press conference potentially providing clarity. Globally, the prevailing bias towards tighter policies and proactive adjustments in some countries from neutral levels may prompt a hawkish interpretation of the outlook, though this is not unexpected.