USD/CAD: Wider interest rate differential is a major headwind – Scotiabank

The Canadian Dollar (CAD) has edged marginally higher versus a generally softer USD on the session. If markets are recalibrating the USD’s post-election gains, the CAD’s relatively limited rise on the session makes sense—because it has held up marginally better than its peers following the US vote, Scotiabank’s Chief FX Strategist Shaun Osborne notes.

CAD steadies on the daily chart

“While commodities are a little firmer generally today, it has been a rough week for raw materials overall amid concerns about global growth and weak Chinese demand—as well as the stronger USD. The CAD’s principal headwind comes from spreads, however, with short-term cash and swaps spreads having widened significantly in the USD’s favour in the wake of US election.”

“The 2Y cash bond spread reached 117bps earlier this week (the widest since the late 1990s) before narrowing modestly. Short-term price action is reflecting a little softness in the USD since the start of trading in Asia and the USD’s persistent overbought status should keep markets on alert for a pullback in recent gains.”

“But there is nothing in price action to suggest a significant drop in the USD is likely. A short-term consolidation in the USD is possible but minor dips to the 1.3950/55 area are likely to prompt renewed buying. A weekly close above 1.4040 will support the outlook for more medium term gains in the USD towards the 2020 peak just under 1.47.”