CAD Strength Driven by Tighter Spreads and Commodity Gains
The Canadian Dollar (CAD) is experiencing bullish momentum, according to Scotiabank strategists Shaun Osborne and Eric Theoret. They note that USD/CAD trades below their fair value estimate of 1.3895, supported by tighter US-Canada 2-year spreads and firmer commodity FX.
Osborne and Theoret highlight the role of spread compression in driving CAD gains. The US/Canada 2Y bond differential has narrowed by 25bps since its late July peak, which they attribute to underpinning CAD strength.
The strategists also mention that a large speculative short CAD positioning may be squeezed further, as the latest CFTC data reflected a still very significant net speculative short CAD position. They predict a potential move towards 1.3817 and potentially the 1.35-1.37 range if USD/CAD breaks below 1.39.
However, they caution that resistance remains at 1.3965/70 and (firm) 1.4000/25.