CAD Slips Below 1.41 – Scotiabank Analysis
The Canadian Dollar (CAD) continues to weaken this morning, underperforming against the US Dollar (USD) by 0.2%, according to Scotiabank’s Chief FX Strategists Shaun Osborne and Eric Theoret.
Federal Budget Impact
"As expected, the Federal budget laid out significant spending on housing, defence, infrastructure and productivity and competitiveness, all aimed at boosting investment and lifting growth. The red ink spillage is significant, though with the current FY deficit forecast to rise to CAD78bn (well above the CAD42bn projected under the previous government back in December)."
The sizable budget deficit forecasts reflect increased government spending to stimulate economic growth and productivity.
Political Context and Currency Reaction
"The minority government will need help for the budget legislation to pass but another election seems very unlikely at this point. The CAD looks unimpressed and spot gains are deviating more significantly (well above one standard deviation) from our fair value estimate (1.3917) again."
The Canadian Dollar shows limited positive reaction despite the budget measures, trading above its fair value estimate but not convincingly strong.
USD/CAD Technical Levels
"Spot dollar gains through the 1.4080 resistance point (now initial support) have been flagged as a risk for a while now and the USD’s progress through to the 1.41 handle this morning points to further appreciation to the 1.4160 area (50% retracement of the Feb/Jun decline in the USD at 1.4167)."
Breaking the 1.41 level suggests the USD may strengthen further against the CAD toward 1.4160, marking a key technical retracement point.
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Author's summary: The Canadian Dollar is weakening amid a rising fiscal deficit and political uncertainty, with USD/CAD poised for further gains above key technical barriers.