Canadian Dollar: Scope to strengthen against US Dollar - Societe Generale

Societe Generale strategists see 1.3990/1.4030 as a key short-term resistance zone for USD/CAD following its rebound from 1.3730. They argue that a failure to break above this area could keep the broader decline intact, with 1.3840 as initial support. On the macro side, the Bank of Canada (BoC) is expected to leave rates unchanged, while inflation and growth projections support a patient stance, though renewed US-Canada tariff tensions could inject a more hawkish tone into the outlook.

Rebound faces critical resistance band

"USD/CAD recently reached the interim projection of 1.3730 and has staged a rebound. The July low and the 50-DMA at 1.3990/1.4030 could act as a key resistance zone in the short term. If the rebound stalls below this hurdle, the current phase of decline may continue. The recent pivot low around 1.3840 is first support. There would be a risk of resumption in the downtrend if the pair fails to hold above this."

"In Canada, the market view is overwhelmingly for no change by the BoC today. The policy rate should stay at 2.25% today, the lower end of the neutral range (upper end 3.25%). Seven successive meetings of no change suggest the central bank is fairly confident that policy is appropriate for inflation to return to target over the medium-term."

"Headline inflation in Canada returned above 3.0% in July on higher energy prices but underlying pressures are less of a concern. Core is running at 1.9%, slightly below the 2.0% target. "

"At the July meeting, the BoC projected both growth and inflation to average around 2% through 2027 and 2028, reinforcing the case for patience. Money markets price just over two hikes by April next year, in line with the US."

"Tactically, USD/CAD is cheap based on 2y rate differentials so GCAN yields must rise and spread narrow from 133bp to justify current valuation of the Loonie near 1.39."

"The question is whether the confidence is challenged following the resumption of tariff hostilities with the US last week. It’s a matter for the press conference by Governor Macklem but the global bias towards tighter policy and pro-active adjustment in some countries from neutral policy levels means a hawkish spin on the outlook would not come as a surprise."