Bank of America (BofA) suggests that the USD/CAD rally has likely overshot its justified levels when considered in the context of cross-asset drivers. Ranking at the 94th percentile since 1999, the rally has been particularly aggressive. This significant strengthening of the USD against the CAD has occurred despite relatively higher crude oil prices earlier in August and comparable yield movements in both the U.S. and Canada.

Key Points:

• High Percentile Rally: The speed of the USD/CAD rally since July 31 is at the 94th percentile when measured against historical data since 1999.

• Oil Prices and Yield Differentials: The Canadian dollar has weakened noticeably, even with crude oil prices being relatively higher in the first half of August. Yields in both countries have moved up in real and nominal terms, making the current USD/CAD spot appear rich.

• Financial Conditions and Risky Assets: Financial conditions have tightened due to a selloff in U.S. Treasuries. Despite this, the CAD's weakness seems to have overshot when compared to declines in other risky assets like the S&P 500.

Implications:

For Traders and Investors:

• Re-Evaluation: Traders may want to re-evaluate their USD/CAD positions, considering BofA's analysis suggests the pair is overvalued in the short term.

• Watch Cross-Asset Drivers: Keep an eye on crude oil prices, interest rate differentials, and risky asset performances as these factors could influence the USD/CAD exchange rate.

• Tightened Financial Conditions: Given the tightened financial conditions due to the U.S. Treasury selloff, traders should also watch out for potential changes in risk sentiment.

Conclusion:

Bank of America's analysis suggests that the USD/CAD's recent rally has likely overshot in the short-term, especially when considering cross-asset drivers such as crude oil prices and yield differentials. Traders and investors might want to exercise caution and re-evaluate their positions in this currency pair.