CAD is firmer and lags peers – Scotiabank

The Canadian Dollar (CAD) is firmer against the weak US Dollar (USD) on the session so far but gains are lagging the CAD’s major currency peers, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

Narrowing US/Can spreads are supportive

"There is room for further improvement in the CAD, however. Lower US rates are helping compress US/Canada spreads meaningfully. The 2Y cash bond and swap spreads have narrowed sharply this week to trade back to the narrowest yield advantage (just over 100bps in both cases) for the USD since December. The 2Y cash bond spread is back under its 200-day MA for the first time since last March, suggesting a further, meaningful narrowing in the yield gap may develop."

"Narrower spreads are driving our fair value estimate for spot lower—1.3599 this morning—and should help drive a little more strength in the CAD in the short run. Broader USD weakness and the drop in spreads will limit scope for USD rebounds from here. Spot has not made any decisive progress lower in the way that some of the other dollar pair have today and, in effect, USD/CAD remains within the recent range that has pivoted around the low 1.37 zone."

"The makings of a more significant technical drop are apparent on the short-term chart, however, where major, short-term support sits at 1.3670 (a potential bearish Head & Shoulders trigger). A clear break under support would imply potential USD losses to the mid-1.35s, near the midJune low. Resistance is 1.3725 and 1.3750."