Trade Deadline Shifts Risk-Reward in Favor of Short CAD Squeeze
The upcoming US-Canada trade deadline on August 19 is a key focus for traders this week, but recent developments have shifted risk-reward in favor of a short CAD squeeze. The extreme short CAD spec positioning, out of line with broader dollar direction, has been partly pared as USD/CAD eases off highs. Recent labor market data and lead indicator trends show an under-acknowledged shift back towards Canada upside momentum.
The trend in US short-end yields leaking with the dollar also favors further potential CAD bounce or even a sharper squeeze ahead. On USD/CAD, the mini support break of 1.59 offers extension down to 1.3800/20. A positive resolution or 'can kick' could prime CAD for underperformance recovery on other crosses.
The FOMC Minutes from July 29 will also be closely watched, especially after Chairman Warsh's presser, where he kept his cards close to his chest. The minutes may reveal significant minority support for tightening due to inflation risk and several more seeing the possibility of tightening if upcoming data disappoints.