USD/CAD: extending Tuesday’s bullish reversal - Scotiabank

CAD is soft and extending Tuesday’s bearish reversal while underperforming most of the G10 currencies in a quiet summer trade. 

Key Quotes:

"Domestic rate expectations remain firm following the recent run of stronger than expected data. OIS are now almost fully pricing one full 25bpt BoC rate hike by October and a cumulative 30bpts of tightening by the December meeting."

"The 2Y U.S.-Canada yield spread has narrowed within 55bpts and is now at levels last seen in early June. Measures of sentiment have responded to Canada’s diplomatic dispute with Saudi Arabia, with a notable rise in implied CAD vol at the one-month horizon and smaller increases across longer tenors."

"Risk reversals are still pricing a remarkably small premium for protection against CAD weakness."

"USD/CAD short-term technicals: bullish—USD/CAD completed a key reversal on Tuesday, delivering a bullish outside range from a fresh multi-week low with a close above the prior day’s high."

"The low confirmed the importance of support at the 100 day MA (1.2963) and subsequent gains have cleared anticipated resistance at 1.3020, 1.3050, and 1.3080. Additional resistance appears limited ahead of the 50 day MA (1.3114) and 1.3125."