The Canadian Dollar (CAD) is experiencing a drop of 0.3% against the US Dollar (USD), yet it remains stronger compared to other G10 currencies. This comes amid a US-China trade détente where other currencies are showing larger declines.

Impact Of Yield Spreads

Shifts in fundamentals are impacting CAD, evident in the increasing US-Canada yield spreads as market expectations change regarding Federal Reserve easing. The fair value estimate for USD/CAD is now 1.3922 and may increase with new Canadian bond trading developments.

Near-term CAD movements will likely depend on broader market trends and tone. The focus is on key data releases such as building permits, housing starts, and manufacturing sales scheduled for this week.

USD/CAD has reached new local highs, surpassing the previous range high of 1.3900. The break of the 61.8% retracement at 1.3944 shifts attention to levels above 1.4100, with the RSI indicating bullish momentum. Support is expected around the 1.3900-1.3850 range.

With the recent price action breaking above the 1.3900 threshold and holding firm, we are seeing directional momentum strengthening in favour of USD appreciation, at least in the immediate term. Powell’s cautious tone, combined with more resilient US data and a more gradual disinflation process in Canada, has fed into the widening of front-end rate differentials. That divergence is material—not just in narrative but now in yields—and is reinforcing broader USD demand.

What we’re dealing with is not merely a reaction to high-frequency data but rather a configuration of expectations baked into price. Bond market activity continues to validate this. Canada’s latest primary issuance tilted towards longer maturities, suggesting there’s some positioning being built off the back of extended rate hold assumptions. That aligns quite neatly with the perceived delay in Canadian rate reductions. The BoC is effectively cornered at this point—labour market data is soft, but core inflation has plateaued. The result: an uneasy drift towards policy ambiguity, which FX markets historically dislike.

Technical Analysis Observations

Technically, with USD/CAD climbing above the 61.8% Fibonacci retracement and holding there, we’ve started watching for price extension towards the psychological 1.4100 handle. Liquidity is thinner at those levels, so we could see sharper movements, particularly if US macro outperforms again this week. RSI remains firm—hovering just below overbought but not flashing divergence—so there’s scope for further bullish pressure. If there were to be a pause, initial areas of support still sit comfortably in the 1.3850 range. Shorter-term volatility metrics have also begun creeping higher, something we read as a sign that optionality is being re-priced with more urgency.

From a trading perspective, the implications are fairly direct. Options markets will need recalibration as skew continues to favour calls, particularly through the next two to four weeks. The term structure in CAD volatility is also steepening, suggesting that market participants have started embedding more risk premium for both directional and realised vol. We expect that to persist unless there’s a material downside shock either in US growth or a hawkish surprise from Ottawa, both of which look increasingly unlikely based on current forward-looking indicators.

What we should be watching closely in the next few sessions is whether US data prints cause the Fed-dated forwards to shift meaningfully again. As of now, Canadian economic surprises would need to exceed expectations by a margin that seems inconsistent with prior trends. The market has already discounted a moderately weaker Canadian macro profile, so the bar for reversion is quite high.

The immediate reaction should be tactical rather than sweeping. Look at timing entries around technical inflections with a preference to fade extended downside moves in CAD unless new data compels a wholesale re-pricing of BoC policy paths. If this trend persists, we could see month-end flows adding further support to the strength in USD-denominated positions. For now, the asymmetry continues to lean in one direction, with risk exposures increasingly tilted towards broader USD advances and CAD’s relative underperformance sharpening around key inflection points.

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