The weekly chart for the USD to CAD conversion looks vulnerable to further downside pressures despite fundamentals signalling that the pair may be undervalued.

The Canadian Dollar is trying to regain the initiate against its cross-border cousin having been on the back-foot for six trading days now.

The USD to CAD conversion has appreciated from Friday the 19th's open at 1.2781 to today's inter-bank rate of 1.2920.

The appreciation in USD/CAD appears to have a lot to do with the fortunes of the oil price as the currency is closely aligned to oil prices and therefore the fate of the commodity is also often the fate of CAD.

The drop in oil prices seen over recent days comes after a solid run, that coincided with USD/CAD's decline. The reason for the pullback could have a lot to do with the upmove becoming overdone on a technical basis.

However, there are fundamental underpinnings to the decline too: China increasing exports of refined oil products, Iraq and Nigeria remaining defiant about working with OPEC and the US adding oil rigs for an 8th consecutive week.

Too Soon to Call a USD Recovery

Despite the recent downside pressure on the Canadian Dollar, it is too soon to suggest USD/CAD has seen a swing in fortunes for the better.

The chart of the USD/CAD is suggesting that the next major leg for the pair will be lower, as the sideways consolidation, which began at the April lows starts to look overwrought.

It also looks highly unlikely that the pair will break higher from this consolidation and move up towards the 1.30s – with a break lower towards the 1.2460 lows looking much more likely instead.

Such a move down to 1.2000, or perhaps even lower if it occurred, would result in the completion of a three wave measured move, or a-b-c correction, which would give the chart a more satisfying look-and-feel than a break higher.

The weakness displayed last week, however, already potentially signalled a breakout lower, as it could be argued the exchange rate broke out below the lower line of the sideways consolidation.

A break below last week’s lows would confirm a continuation down, with a fairly strong possibility of the pair moving down to the level of the 1.2460 lows.

BMO Capital Market’s see USD/CAD Strength on the Horizon

Last week saw poor Canadian data trumped by US and UK data, and this offset some of the positive impact of rising oil prices.

With no notable events for the Canadian dollar this week, BMO expect the pair to fall back into line with oil, to which it is highly correlated (78% average over 10 years).

If oil continues its recovery, therefore, that should pressure USD/CAD lower in line with the technical forecast above.

Nevertheless, BMO are overall bullish, stating that: “We still target a move to 1.31 in September, so we would be buyers on dips below 1.2790.”

Part of their argument rests on growing disparity between the interest rate outlook in the US, which has risen more than in Canada, and should therefore also lead to a rise in the pair.

They add, however, (in the interests of full disclosure) that their rotating financial model takes the opposite view as, “Our model would be a seller on spikes above fair value, which it registered at 1.2886 on Friday’s close.”