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    USDCAD to end the year around the 1.30 area - Scotiabank

    Shaun Osborne, Research Analyst at Scotiabank, expect the USDCAD to end the year around the 1.30 area, little changed from current levels but also expect the CAD to retain a defensive undertone against the USD in the next few months at least as Fed tightening risks overshadow other potential drivers of the CAD’s performance.Key Quotes“The CAD remains a strong performer in year-to-date terms but the past month has seen the CAD retreat against the USD for the first time since January. A number of factors have come together to check the CAD’s recovery. Firstly, the relative outperformance of the Canadian economy over the US is poised to reverse in Q2; Canadian activity has been clipped back by the impact of the wildfires in Alberta and the US economy now looks poised to recover from a weak start to the year. Consequently (and secondly), interest rate differentials — which had narrowed against the USD earlier in the year — have started to widen in the USD’s favour again, reflecting better US growth dynamics and clear messaging from the Fed to prepare for policy tightening.A third factor is that crude oil prices have settled into a trading range and, capped around $50/bbl, provide much less support for the CAD than earlier in the year when prices were recovering strongly. Our own correlation studies reflect a decline in the influence of commodity prices on the CAD and an increase in the influence of short-term interest rate differentials on spot in the past few weeks.Fundamental factors favour the USD appreciating modestly at least against the CAD in the near-term. This development conforms to the typical seasonal trend (modest USD appreciation) seen through mid-year and is reflected in more USD-bullish price signals on the technical charts which suggest the risk of a push higher towards 1.35 or so on a 1-3 month time horizon. Speculative positioning is also shifting against the CAD; IMM data have reflected a bullish bias on the CAD since February but data through late May suggest investor sentiment is moderating at least.”

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