TD Research discusses USD/CAD outlook and promotes fading USD/CAD rallies above 1.34.
"The first couple of trading day this month has not been kind to the loonie. It sits at the bottom of the league table, dropping nearly 1.4% since the start of December.
We suspect that the recent sell-off is starting to look a bit overdone and certainly don't agree with a real terminal rate of zero. In this regard, we note since the October lower USDCAD has rallied roughly 5%. During this time our HFFV gauge shows that fair value deteriorated a touch above 5%, indicating that much of the sell-off was warranted. For one thing, front-end rate spreads moved nearly 23bp in the US's favor, which given the betas, explains about 40% of the move," TD notes.
"Taken together, we're not looking for an explosive rally in USDCAD now, which leaves us fading the rallies on breaks of 1.34 and yet our core view remains to hold CAD shorts against undervalued G10 currencies like GBP, NOK, and JPY," TD advises.