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CAD Weakness Backed By Yield Spread, USD/CAD Upside Favored

CAD Weakness Backed By Yield Spread, USD/CAD Upside Favored

2017-11-27 22:00:00
Tyler Yell, CMT, Currency Strategist
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Talking Points:

  • USD/CAD Technical Strategy: strong support at 1.2666, upside favored above
  • CAD net long positioning from institutions continues to decline since early Oct.
  • US/CA 2Yr Government yields spread widens in favor of USD
  • Sentiment Highlight: aggressive bearish shift in retail positioning provides Bullish outlook

The US Dollar has been selling off against leading G10 currencies in the second half of November, but the Canadian Dollar is one currency that is having a difficult time holding gains. Despite the price of Crude Oil trading at 2-year highs this month, the Canadian Dollar has remained relatively weak alongside other commodity currencies like the Australian Dollar and New Zealand Dollar despite short-term gains in a low-volatility environment.

When looking at markets for an explanation, there appears to be a bevy of reasons to favor further CAD weakness. First, institutional positioning or Hedge Funds per the CFTC continue to drop their net-long exposure of the Canadian Dollar. Since early October, the Commitment of Traders Canadian Dollar reading has fallen from 67,297 net long contracts to 23,218 as of last week, the lowest reading since July.

Another argument, besides sentiment to be covered below, is the yield spread between US & CA government debt. When CAD was strengthening across the board over the summer, the yield spread differential between US & CA had a near perfect positive correlation. The reading bottomed out in early September at -26bps with the Canadian 2Yr yield trading at a premium to the US 2yr yield. The day the yield spread bottomed (Canadian government yields largest premium) was the same day USD/CAD bottomed. Today, the yield spread continues to widen in favor of US yield to Canadian yield by 31bps or a 55bp reversal. While the correlation has weakened somewhat, should the pair catch up to the yield spread, we could soon see USD/CAD testing resistance in the 1.2837/2971 zone.

The technical outlook also focuses on a further rises against the broader downtrend that began in early May absent a USD/CAD close below 1.2666. Recently, the November 10/9 lows at 1.2666/68 have provided price support and trading above these levels aligns with sentiment to focus on further upside. Currently, a hold above 1.2666/68 on a closing basis area favors a march to 1.2837 (Nov. 21 high), followed by 1.2 the 200-DMA at 1.2971. A break and close below 1.2666/68 would turn attention to October support near 1.2450.

Unlock our Q4 forecast to learn what will drive trends for the US Dollar through year-end!

CAD Weakness Backed By Yield Spread, USD/CAD Upside Favored

Chart created by Tyler Yell, CMT. Tweet @ForexYell for comments, questions

USD/CAD Insight from IG Client Positioning: overall selling bias provides ST bullish outlook

The sentiment highlight section is designed to help you see how DailyFX utilizes the insights derived from IG Client Sentiment, and how client positioning can lead to trade ideas. If you have any questions on this indicator, you are welcome to reach out to the author of this article with questions at tyell@dailyfx.com.

CAD Weakness Backed By Yield Spread, USD/CAD Upside Favored

USDCAD: Retail trader data shows 46.7% of traders are net-long with the ratio of traders short to long at 1.14 to 1. The number of traders net-long is 7.0% higher than yesterday and 12.0% lower from last week, while the number of traders net-short is 5.8% lower than yesterday and 45.2% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USDCAD prices may continue to rise. Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed USDCAD trading bias (emphasis added.)

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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com

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Contact and discuss markets with Tyler on Twitter: @ForexYell

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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