The Canadian Dollar (CAD) continues to drift higher. Steady CAD gains over the past three sessions reflect general USD weakness but might also reflect some liquidation of the huge mass of CAD shorts reflected in the recent CFTC data, Scotiabank’s Chief FX Strategist Shaun Osborne notes.

Bulls to test 1.3645/50 near term

“The weaker USD is sitting marginally below my fair value estimate today (1.3619) which may mean limited room for additional losses in the short run. The consensus call for Canadian CPI is +0.4% M/M but there is a wide-ish band of expectations around the outcome. Despite a chunky rise in the July month, headline prices are expected to slow to 2.5% in the year, down from 2.7% in June. Core Median and Trim measures are both expected to decelerate a tenth to 2.5% and 2.8% respectively.”

“Slowing inflation will keep the BoC on track to deliver more easing in the coming months, regardless of what happens outside of Canada. Swaps are pricing in 27bps of easing risk at the September 9th meeting and a total of 74bps of cuts over the three meetings left before year-end. Weaker data may check the rise in the CAD in the short run but swaps look very fully priced already.”

“USD/CAD losses are nearing major support just under the 1.36 point. The USD based around 1.3595 in May and July and the 200-day MA sits at 1.3595 this morning. Technical momentum is bearish on the intraday and daily charts. Weekly oscillators are neutral, but close to turning bearish. A sustained break under 1.3595 would drive more USD losses towards major trend support (1.3475 currently) off the mid-2021 low. Resistance is 1.3645/50.”