📝Both Oil And Spreads Needed For USD/CAD Trend Trading: J.P. Morgan FX Strategy

Figure 72. offers a heuristic for pegging tactical USD/CAD targets based on our two-factor model, and suggests that 1.34 is an appropriate target for flat rate spread levels and WTI around $70/bbl. This underscores a key component of our USD/CAD framework: trend moves in USD/CAD are typically confined to periods where both oil and CA- US rates move in the same direction. Such conditions were met both in September (USD/CAD 1.31 to 1.38) and more surprisingly in March as well (banking-led rate spread compression and oil support on OPEC+ surprise drove USD/CAD from 1.38 to 1.33). Unless and until US-CA rates narrow against the backdrop of improved prospects for oil prices, USD/CAD is liable to remain range-bound. In terms of risk factors, we would highlight that USD/CAD has been positively-corre- lated with vol indices; in the context of a potential showdown with the US debt ceiling, USD/CAD is liable to move higher on a more risk-negative backdrop. CAD fell, on average, by 5% from peak to trough vs a basket of USD, CHF & JPY around the 2011 US debt ceiling stress. - J.P. Morgan FX Strategy