The Canadian dollar has sold off sharply since early October (by 4.5% against the USD, see fig 1). Broadly speaking, that reflects the large move higher in US rates, while Canadian rates have only moved up modestly (see fig 1c). In particular, in the US, the macro data has been better than expected, the rates market has priced out cuts for next year, and markets have been focussed on the inflationary impact of Trump’s tariffs (as well as other polices, most of which are pro-growth and inflationary). Rate cuts in Canada have also been priced out (albeit by a smaller margin vs. the US).
On many measures, though, US Treasuries are over-extended (see our market positioning note from late October). That is, there are good technical and macro reasons for lower US yields over coming weeks. That should put a bid under the CAD (all else equal).
Added to which, from a positioning perspective, the market is now heavily net SHORT the CAD (and just shy of its record net short position from earlier in July, see fig 1b). Consistent with that, medium term models are on/close to strong BUY (e.g. see fig 1a), while sentiment is bearish (and close to a contrarian BUY signal). We would also note that oil is technically oversold. Historically, a strong oil price has supported the CAD. While that correlation has recently broken down, oil prices bear watching closely. Indeed it seems likely that the CAD rallies in coming weeks from oversold levels, with that strength enhanced by both a stronger oil price, and a narrowing of spreads.
Fig 1: USD-CAD candlestick futures, shown with 50 & 200 day moving averages
Fig 1a: CAD market timing model vs. CAD spot price
Fig 1b: Net speculative positioning (no. of contracts) vs. CAD spot price
Fig 1c: US 5 year Treasury yield over Canadian (bps) vs. USD-CAD
