Credit Agricole notes that their FAST FX model indicates the USD/CAD is significantly overvalued in the short-term, despite ongoing influences from risk sentiment and yield curves. The bank maintains a short position on the currency pair, targeting a move toward 1.3399.

Key Points:

• USD/CAD Divergence: Credit Agricole points out that the USD/CAD exchange rate has been diverging from both the US-Canadian short-term rate differential and oil prices.

• Role of Risk Sentiment: The bank cites risk sentiment as one of the primary drivers of the USD/CAD rate. According to their FAST FX model, global equities have the strongest influence on USD/CAD, and the Canadian dollar (CAD) has the highest correlation with their FX Risk Index among G10 currencies.

• Impact of Yield Spreads: The relative slopes of the U.S. Treasury and Canadian Government Bond yield curves—known as the box yield spread—are also contributing to the USD/CAD's current level. The recent steepening in the U.S. Treasury yield curve has helped boost the currency pair.

• Overvalued According to FAST FX Model: Despite these factors, Credit Agricole's short-term fair-value model, FAST FX, still considers the USD/CAD to be significantly overvalued.

Upcoming Influencers:

• China Data: Reactions of global equities and oil prices to upcoming Chinese economic data will be significant short-term drivers for USD/CAD.

• US Retail Sales and Inflation Data: These metrics are expected to be the primary driver for USD/CAD in the near future.

Position:

Credit Agricole is maintaining a short position on USD/CAD, targeting a decline to around 1.3399.

Conclusion:

While the USD/CAD rate is being influenced by several key drivers, including risk sentiment and yield spreads, Credit Agricole's FAST FX model still finds it to be significantly overvalued. The bank remains bearish on the currency pair in the short term, targeting a downward move. Investors should closely monitor upcoming data releases from both China and the U.S. for further clues on the USD/CAD's trajectory.