Why USD/CAD Should Fall

Why USD/CAD Should Fall

Why USD/CAD Should Fall

Most major currency pairs have very strong correlations with their yield spreads and USD/CAD is no exception. Taking a look at the chart below, USD/CAD has moved in lockstep with 2 year yield spread for most of the year. However in the past month, there’s been a major breakdown in the correlation of these two instruments. The yield spread has fallen sharply, pointing to a lower USD/CAD and yet the currency pair is trading strongly. Oil prices have also moved higher in this time, confirming our view that the currency pair should be trading lower -- and yet it isn’t. There’s no clear explanation for this divergence outside of the general underperformance of commodity currencies. Typically these divergences do not last for long and perhaps CAD traders are simply waiting for Thursday and Friday’s economic reports before taking the currency pair lower. USD/CAD is in play over the next 2 days with retail sales, CPI and GDP scheduled for release. The sharp rise in wholesale sales point to stronger consumer spending while the drop in the price component of IVEY signals lower inflation pressures.

Technically we really need to see USD/CAD below the 2-day low and 50-day SMA of 1.3350 for technical outlook to shift from positive to negative but as long as it remains below 1.35, the path of least resistance should be lower.

Chart Of The Day

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