The CAD has picked up a little ground in overnight trade, supported by a firmer risk backdrop and the USD’s overall drift, Scotiabank’s Chief FX Strategist Shaun Osborne notes.

Narrower spreads support gains.

“The compression in US/Canada yield spreads remains a key driver of broader CAD gains. The 2Y spread has eased to just under 60bps as US yield edge lower, the narrowest yield gap since May. Spread compression plus the general weakness in the USD is very likely driving CAD shortcovering demand. Spot continues to trade a little below our estimated fair value (1.3537 today).”

“The divergence is not significant but may constrain the CAD’s ability to extend gains significantly for now. Decent gains in the USD yesterday failed to deliver a definitive signal that USDCAD’s August slide was steadying. The shortterm downtrend remains intact and trend oscillators remain bearishly aligned for the USD across the intraday, daily and weekly DMIs.”