Where we are: USD/CAD currently trades at 1.3666, down 0.21% on the day, having ranged between 1.3663 and 1.3714. The pair is testing the lower end of its recent range after trading above 1.37 yesterday in New York. This move lower is a continuation of the trend seen over the past month, where the Canadian Dollar has strengthened over one percent.
What’s driving it: The primary driver is the broad USD weakness, with the DXY down 0.31% to 98.36. The move in DXY is correlating to weakness in US yields, with the US 2Y down nearly 6bp to 3.785%. The US-CA 10Y spread remains elevated at +84bp, but this is not offering any support to USD/CAD amidst the broader USD softness. Positioning in CAD remains modestly short, but is not at an extreme that would suggest any immediate squeeze risk, despite the move.
- US 2Y Yield: 3.785 (-0.059, -1.53%) suggests risk-on sentiment.
- WTI Crude is up sharply to $91.06, but CAD is underperforming relative to crude, suggesting a potential catch-up trade if crude holds these levels.
- Net non-commercial CAD positioning increased by nearly 20k contracts to -58,834, indicating that speculative shorts are being added into this move.
NY session focus: The NY session will be focused on whether the risk-on bid continues, particularly in tech. Keep an eye on the S&P 500 futures which are up 0.72% to 7194.75. Crude oil price action will also be critical to confirm the CAD strength. We also have President Trump speaking at 17:00 London. Key levels to watch are 1.3650 on the downside and 1.3720 on the upside. The trade that’s working is short USD/CAD. The trade at risk is long USD/CAD, particularly if we see a further breakdown in yields and DXY. The pain trade would be a sharp reversal in risk sentiment sending yields and the dollar higher, which could quickly squeeze CAD shorts.