CAD Struggles as USD Rises Amid Widening Yield Gap
The Canadian Dollar (CAD) is struggling as the US-Canada yield gap widens, causing USD/CAD to climb to a fresh two-month high. Despite a rebound in Oil prices, the CAD remains under pressure due to diverging Fed and BoC outlooks.
Markets are looking to Canadian GDP data on Tuesday and key US data releases this week for direction on USD/CAD. The US 2-year Treasury yield trades near 4.90%, while its Canadian counterpart is around 3.37%. The gap between the 10-year yields is also wide, with US Treasuries near 5.21% and Canadian government bonds around 3.96%.
Strategists at Brown Brothers Harriman argue that the USD can continue to benefit from widening US-G6 interest rate differentials and rising US longer-term real yields. However, they caution that tightening by other major central banks limits policy divergence with the Fed and suggests DXY could struggle to sustain an overshoot of its June 24 high at 101.80.
At the time of writing, USD/CAD trades around 1.4165, its highest level since July 13. The Canadian Dollar has lost more than 2% so far this month as the US-Canada yield gap widens.