Synopsis:

Credit Agricole sees USD/CAD poised to test the 1.40 psychological level in the near term as CAD underperforms against USD. Despite stable rate differentials and steady oil prices, the CAD has lagged other commodity currencies, partly due to market expectations of further BoC rate cuts if Canada’s unemployment rate continues to rise.

Key Points:

• CAD Underperformance: Following recent US jobs data and election results, CAD has underperformed other commodity currencies, like MXN, without clear economic drivers for the gap.

• Focus on Canadian Labor Data: October’s labor report is critical; a continued rise in unemployment could lead markets to expect more aggressive BoC rate cuts, with the policy rate potentially reaching the upper neutral range by December.

• Rate Cut Expectations and USD/CAD Upside: Consecutive 50bp cuts from the BoC could weaken CAD further, pushing USD/CAD toward the key 1.40 level.

• Market Positioning: Heavy CAD short positions provide some resilience, though Credit Agricole cautions that further CAD declines could still breach 1.40.

Conclusion:

Credit Agricole expects USD/CAD to approach 1.40 as Canada’s labor data and potential BoC rate cuts heighten CAD vulnerability. With CAD underperformance and expectations for rate easing growing, the pair may challenge the psychological barrier, although market shorts provide slight downside cushion.