Spreads remain a headwind – Scotiabank

The Canadian Dollar (CAD) is little changed against the USD, with spot holding close to 1.38 on the day. The CAD’s slide against the USD steadied through mid-week which was not unexpected, given the extended and sustained drop seen since the start of the month, Scotiabank’s Chief FX Strategist Shaun Osborne notes.

CAD holds little changed near 1.38

“USD/CAD gains looked stretched relative to our fair value estimate at the start of the week and while the CAD has been able to stabilize, headwinds remain significant—especially from the cash bond and swap spread perspective where the risk of a November hold decision from the Fed and a 50bps cut by the BoC next week has driven differentials wider.”

“The 2Y bond spread gap has widened to 95bps—the widest spread since the late 1990s. The CAD will struggle to rebound while rate spreads remain this significant. Spot’s peak Tuesday around the 1.3840 mark coincides with minor resistance denoted by the early April high.”

“Spot rebounded smartly Thursday but the drop in the USD from the early week peak has left a bearish print on the intraday and daily charts (‘shooting star’ signals) which may represent a near -term top for the USD, particularly with the latest run higher in the USD looking stretched on the charts. Support is likely to remain firm on minor dips to the low/mid 1.37s for now. Major support is 1.3645/50.”