CAD is up a modest 0.2% from Monday’s close, fading its short- lived 0.5% rally into the European open while seeing renewed pressure into the NA session. Near-term domestic risk is limited, and the broader tone is likely to remain dominant as we look to the release of high-level U.S. retail sales data.
The outlook for relative central bank policy remains the primary driver for CAD, with a 2Y U.S. – Canada yield spread pushing toward 35bpts—its widest level since March. Markets are pricing a near-certain probability of a December hike from the Fed while pricing no change for the Bank of Canada over the next 12 months.
Measures of implied CAD volatility are elevated at the upper end of their recent range, and risk reversals suggest a sizeable premium for protection against CAD weakness. Monday’s (holiday-delayed) release of CFTC positioning data showed a continued deterioration in CAD sentiment driven by waning confidence among CAD bulls alongside a steady build in bearish short positions. We remain bearish CAD into year-end.
Technicals: bullish
The technical signals are all overwhelmingly bullish as USDCAD continues to retrace its January-May decline. The 50% retracement (1.3575) has been broken and we look to further USDCAD gains toward the 61.8% Fibo at 1.3839 (middle chart). Near-term support is expected between 1.3500 and 1.3480.
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