Where we are: USD/CAD is currently trading at 1.3603, down 0.56% on the day. The pair broke lower in European morning trade after consolidating in a narrow range overnight, supported by the bottom end of the day’s range at 1.3598. This move erases Friday’s gains and puts USDCAD back near the week’s lows.
What’s driving it: Dollar weakness is the primary driver, with the DXY shedding 0.29% to trade at 98.14. This is compounded by a modest bid in risk assets, as seen in futures markets. The US 10-year yield, while slightly higher at 4.323%, isn’t providing significant support to the greenback, and the US-Canada 10-year yield spread remains wide at +83bp, giving little incentive for CAD strength. Speculative positioning in CAD remains modestly short, although the recent increase in net shorts suggests a degree of capitulation, leaving some squeeze potential.
- USD broad index down -0.24% as of last week Friday.
- US 10Y real yield (TIPS) is falling, which is a tailwind for gold and a headwind for the USD.
- Nikkei outperformance is broad-based, hitting its best levels in weeks.
NY session focus: All eyes are on US data later this week, but today’s session will be driven by risk sentiment and dollar flows. Watch for any break of the 1.3598 level, which could open the door for a move towards 1.3550. On the upside, a sustained move above 1.3650 would negate the bearish momentum. The trade that’s working is short USDCAD on dips, targeting a move towards 1.3550. The trade at risk is being long USDCAD, especially if equity futures continue to grind higher. The pain trade for USDCAD is a sharp reversal in the DXY, pushing the pair back above 1.3700.