Soft stocks are helping keep the Canadian Dollar (CAD) tone defensive but whether weaker equity markets are enough of a justification for driving the CAD significantly lower at the moment remains to be seen, Scotiabank’s FX strategist Shaun Osborne notes.

Heightened CAD volatility is possible

“Thinner liquidity Monday, when local markets are closed, might open the door for heightened CAD volatility in response to still weaker equities but that is not necessarily something that is well grounded in fundamentals.”

“Beyond weak stocks, underlying factors (spreads, crude oil and the general USD tone) have moved in the CAD’s favour in the past few days, leaving spot trading a big figure above our fair value estimate (1.3785). That should help constrain the USD’s ability to push higher to some extent but the CAD is unlikely to pick up too much ground while stocks are trading defensively.”

“The CAD got clobbered yesterday, driving spot to near the late 1.2023 high just under 1.39. Spot has consolidated below the figure this morning but there is scant sign of any CAD-positive price developments on the intraday chart. Rather, the USD appears to be pausing ahead of another attempt higher from a technical point of view. Support is 1.3790/00. Resistance is 1.3890/00 and 1.40.”