The Canadian Dollar has strengthened to its highest level in two months, with the USD/CAD currency pair mean-reverting to 1.3933 from a previous high of 1.4248 in late June, according to Societe Generale’s Kenneth Broux [1]. This movement brings the pair close to its fair value based on two-year bond spread models, which show a strong correlation (Rsq 0.8) [1]. Broux notes that a further test of 1.3900 would represent a 50% retracement of the rally seen between May and June [1].
The recovery of the Canadian Dollar has been attributed to several factors, including a rebound in WTI crude oil prices above $82 per barrel, the elimination of speculative short positions against the loonie, and a dovish repricing of the US Federal Reserve’s outlook following the latest Non-Farm Payrolls (NFP) data [1]. While Canadian building permits data is upcoming, Broux suggests that market attention will remain focused on the US Consumer Price Index (CPI) as the primary driver for the loonie’s direction [1].
In the context of G10 currencies, the long CAD/short JPY trade has been the best carry performer so far in August, delivering a return of +0.63% [1].
CONCLUSION
The Canadian Dollar’s recent rally is supported by stronger oil prices, reduced speculative shorts, and shifting expectations for US monetary policy. With USD/CAD now near fair value and a key retracement level in sight, market participants are watching US CPI data for further direction. The loonie’s outperformance in carry trades highlights its current market strength.