Look to fade USD/CAD gains near-term – TDS

FXStreet (Barcelona) - FX Strategists at TD Securities, explain that with oil prices halting its fall, and spreads remaining narrower, their FV estimate suggests that there exists a significant overvaluation in spot, and further suggest to fade any near-term USD/CAD gains.

Key Quotes

“Narrower spreads and oil prices that have at least stopped falling for now have significant implications for our CAD fair value model; as the principal drivers of our fair value estimate, recent developments (especially the narrowing in US-Canada spreads) have been followed by as steady decline in our equilibrium estimate for spot since the model peaked in late February.”

“Our model is starting to signal a fairly significant overvaluation in spot—which is more than two big figures and one standard deviation above our fair value estimate this morning (1.2418).”

“Alongside the evident resistance to USD gains below the 1.28 area, our FV model suggests—currently, at least—that the USD is likely to struggle to improve near-term and, all else remaining equal, should trade lower.”

“Keep in mind that seasonality is usually strongly USDCAD-negative in April. Look to fade USDCAD gains near-term.”