Canadian Dollar Strength Gains Momentum Amid Narrowing Yield Spreads

The Canadian dollar has been gaining strength in recent days due to narrowing interest-rate spreads and crowded short-CAD positions, according to Scotiabank.

USD/CAD fell 0.38% on Friday and almost 1% over August so far, leaving the pair close to its lowest level of the month, around 1.3875.

The bank's fair-value estimate was around 1.3895, but it argued that this 'may not stop the CAD from squeezing out a little more strength in the short run.'

Trend momentum signals are aligning across several horizons, supporting the prospect for a significant move lower to develop, with Scotiabank seeing a possibility of a return towards the 1.35-1.37 region if USD/CAD falls below 1.39.