USD/CAD prone to retrace losses ahead of BoC meeting - TDS

According to analysts from TDS, the USD/CAD pair is prone to retrace losses towards 1.32 ahead of the Bank of Canada July meeting next week. But they warn compressing US-CA rate spreads imply the path of least resistance is lower. They expect the BoC to keep rates unchanged. 

Key Quotes: 

“With the BOC likely reluctant to follow the Fed into the deep-end - at least, right away - the CAD now becomes a contender for carry in the G7- a status long championed by the USD in this cycle. For this reason, we think this will help support CAD outperformance on the crosses as well, particularly against the low yielders (provided that risk is not completely upended).”

“We have revised our forecast for USDCAD lower. We expect a break of 1.30. But we think this will inevitably become an exercise to discover the Bank of Canada's pain threshold for CAD appreciation. If history is any guide, we think the 1.25 marker in USDCAD could be problematic before it induces an endogenous response from the BOC - whether actual policy or a shift in its communication strategy.”

“We think markets will appreciate this and hence, we expect 1.28 to become a more formidable level of support. Ahead of the event risk, we think USDCAD may be more inclined to retrace some of its losses. We think this is more of a reflection of profit taking and thin liquidity following CAD outperformance in the last two weeks. As such, we think this retracement should be shallow and contained towards 1.32. We would view a move to this threshold as an opportunity to re-engage in USDCAD shorts.”