The Canadian Dollar (CAD) has shown some strength in recent trading sessions, thanks to a more positive risk environment and the ongoing weakening of the US Dollar (USD), according to insights from Scotiabank’s Chief FX Strategist, Shaun Osborne.
Key Factors Driving CAD Gains
Osborne highlights that the narrowing of yield spreads between the US and Canada has been a significant factor behind the CAD’s recent uptick. The 2-year spread has contracted to around 60 basis points, the smallest gap since May. This trend, coupled with the overall weakness in the USD, is likely fueling demand for CAD as short positions are covered. Despite trading slightly below the estimated fair value of 1.3537, the CAD has shown resilience.
However, Osborne notes that while the divergence between the US and Canadian yields is not substantial, it may limit the CAD’s ability to make significant gains in the near term. Despite a modest rebound in the USD, there is no clear signal yet that the downward trend in USDCAD is reversing. Technical indicators suggest that the USD remains bearish across different timeframes.
Looking ahead, Osborne suggests that significant hurdles lie ahead for the USD to reverse its fortunes. Resistance levels are seen at 1.3475 and 1.3490/00, with a more substantial barrier at 1.3620. On the downside, a breach below 1.3440 could reignite selling pressure, targeting 1.3350 as the next support level.
Expert Analysis and Predictions
Based on the current market dynamics and technical indicators, it is likely that the CAD will continue to benefit from the supportive risk environment and USD weakness. Traders should closely monitor key resistance levels and potential triggers for a bullish reversal in the USD to assess the future direction of USDCAD pair.