USD/CAD inter-market: finds support from yield spread tilting in favour of USD

Ever since the US NFP data release, the USD/CAD pair has eroded almost 350-pips and now mires near five-week troughs, looking to test the key psychological support at 1.2700 levels.

From a drop from above 1.31 handle to 1.2760 so far this week, the correlation between the prices and Fed fund rate futures have come out stronger, while the oil price-action continues to remain a strong driver, justifying the price valuations.

The disappointing NFP figures coupled with not so hawkish comments from Fed Chair Yellen has triggered a sharp decline in the Fed fund rate contracts. The FedWatch tool, Based on CME Group 30-Day Fed Fund futures prices, shows that the probability of a rate hike this month stands at 4%, while last month’s was seen at 7.5%.

Meanwhile, the recovery seen in USD/CAD over the last couple of hours can be explained by the yield differentials between the 10-year treasuries and Canadian bonds tilting in favour of the US dollar. However, a renewed bout of buying interest in the black gold is likely to keep the upside shallow as we head towards the Canadian Ivey PMI report.