USD/CAD: Recent strength has closely matched yield spread trends - Westpac

Recent strength in USD/CAD from around 1.24 to 1.28 has closely matched yield spread trends but markets remain complacent on BoC rate hike pricing, suggesting US-CA yield spreads should start breaking down soon again, reigniting the USD/CAD downtrend, according to Richard Franulovich, Research Analyst at Westpac.

Key Quotes

“Markets discount another hike before the year is out but timing wise continue to heavily favour Oct 25 (76% priced) rather than the more immediate Sep 6 meeting (24% priced). Markets evidently conclude that fresh Oct MPR projections make that a more suitable date. But BoC officials have gone out of their way to make their intentions abundantly clear - insurance easings of 2015 have overstayed their welcome – and the data since their 12 July hike has continued to portray resilience.”

“CAD weakness, notably vs the likes of EUR and AUD looks unwarranted.”