The Canadian Dollar (CAD) is edging lower in tandem with its peers as the US Dollar (USD) firms into the end of the week, though downside pressure remains contained. Softer oil prices and a cautious risk backdrop are mild headwinds, but tightening front-end swap spreads continue to anchor the CAD near fair value, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

USD/CAD tests top of weekly range near 1.38

"The CAD is drifting a little lower, in line with its peers as the USD gains broadly. A cautious risk mood and still soft crude prices remain minor headwinds for the CAD but some additional spread compression, driving the 2Y swap spread to around 75bps, should act as an anchor for the CAD. The swap spread is the narrowest since Oct 2024. Spot fair value is estimated at 1.3805 this morning."

"PM Carney remarked that chances of a sectoral agreement on tariffs were now unlikely and that trade discussion will likely roll into a broader review of USMCA next year. "

"Spot gains are testing the upper reaches of the past week’s trading range. The USD will likely close out the week with a net gain, the first in a month, but it’s not obvious that the rebound is strong enough to extend further into next week. A clear move above 1.38 would suggest some potential for the USD recovery to extend to the mid/upper 1.38 area but perhaps not much more. Support is 1.3760/70 ahead of 1.3725/50."